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Retirement Planning > Spending in Retirement > Required Minimum Distributions

Everything to Know About RMD Planning for 2024

By Roger Wohlner

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What You Need to Know

  • The age for required minimum distributions to commence remains at 73 for 2024.
  • Planning should include strategy for this tax year and for future years as applicable.
  • In some cases it might pay to transfer assets from other plans such as old 401(k)s or individual retirement accounts.

Many advisors are already in the midst of planning for clients for 2024 and in some cases beyond. A key part of planning is required minimum distributions for both 2024 and years ahead.

Here are some issues to consider for clients who are affected by RMDs.

RMD-Related Changes Under Secure 2.0

There are three significant changes arising from the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act that could influence clients’ RMD planning for 2024 and beyond.

  • Maximum amounts for qualified charitable distributions will be indexed to inflation beginning in 2024. Those who are at least age 70.5, can now take up to $105,000 in these distributions in 2024, up from the prior limit of $100,000.
  • Surviving spouses are now allowed to calculate RMDs on their late spouse’s accounts using the deceased spouse’s age and the more favorable Uniform Lifetime Table.
  • RMDs are no longer required on assets in designated Roth accounts such as a Roth 401(k). There is no tax impact here, but this does allow clients to keep assets in these accounts if they choose.

RMDs Will Be Higher in 2024

According to Ed Slott, clients should expect higher RMDs in 2024. Stott attributes that to market gains in 2023 as opposed to losses in 2022, resulting in higher year-end 2023 balances for most clients.

This is both a 2024 cash-flow issue and an issue for 2024 taxes. The cash-flow part concerns whether clients need some or all of the cash from their RMD. This leads directly to the tax issue. Their likely higher RMDs for 2024 will result in higher taxable income and higher taxes for 2024, all else being equal.

If clients rely on the cash flow from their RMD, there might not be any planning issues to deal with. However, there are other situations in which planning for this year and future years makes sense.

Still-Working Exemption

For clients who are still working once they reach the age when RMDs must commence, there is an exemption from RMDs on their employer’s 401(k) as long as they are not a 5% or greater owner of the company. This is not automatic: The employer must have made this election for their plan. Note that RMDs must still be taken from other accounts such as traditional IRAs, old 401(k)s and others as required.

In some cases, it might pay to transfer retirement assets from other accounts to the employer’s 401(k). Employers again determine whether this is allowed. Generally, only retirement assets that were contributed on a pretax basis and the earnings on those assets are eligible. A key issue with this strategy is to determine if the investments available in the employer’s plan are worth investing additional retirement assets into.

With many people working longer, this can be a good strategy. If clients are still earning a decent salary, this exemption can defer RMDs and the taxes on this money until after they have retired from this employer. But watch out: Depending on the size of this account, this could result in significantly larger RMDs when they retire and a larger tax hit down the road.

QCDs

Qualified charitable distributions can be a versatile planning tool for managing RMDs in 2024 and beyond.

For clients who don’t need all of the cash from their RMD, a qualified charitable distribution can be a solid choice. They can use this transfer as part or all of their RMD, avoiding taxes on this portion of the RMD.

The order in which the distributions are taken is important. Be sure the client takes QCDs as part of their RMDs, not after the RMD has been satisfied. In the latter case, the qualified charitable distribution will not count as part of their RMD and there will be no tax savings on the RMD.

Clients who are at least age 70.5 who cannot itemize deductions can begin taking QCDs as a tax-efficient way to donate. These early QCDs will also reduce the amount subject to RMDs in future years.

Tapping 401(k)s and IRAs Early in Retirement

Clients in the “gap” period before taking Social Security and before the commencement age for RMDs can consider tapping traditional retirement accounts such as IRAs and 401(k)s as part of their retirement income planning. This should be done on an annual basis during their early retirement years. Tapping these accounts in years where their income may be lower than normal can help reduce RMDs and the associated taxes in future years.

Roth Conversions and Contributions

Roth accounts can limit the effect of RMDs in future years and to help clients’ retirement tax diversification.

Roth conversions, including backdoor Roths, can be a good strategy for clients who are working as well as those who are retired. In the case of Roth conversions, the tax implications of the conversion in a given year should be a factor.

Additionally, clients who are working can consider contributing to a Roth 401(k) or other retirement plan to build up a balance in Roth account assets. The loss of the current year pretax benefits needs to be weighed against the future tax benefits of not having to take RMDs on these assets.

Money in Roth accounts is a solid way to reduce clients’ future RMDs and also offers a path to pass these assets to most non-spousal beneficiaries tax-free under the Secure Act rules on inherited IRAs.

QLACs

Qualified longevity annuity contracts allow the purchase of a deferred annuity with retirement plan assets from a 401(k), an IRA or other accounts. The money used to purchase the annuity is not subject to RMDs until the annuity is distributed. This distribution can be deferred to age 85.

Secure 2.0 increased the amount that can be used for these accounts to $200,000 indexed for inflation. This is a way to both defer RMDs on the contract premiums and to help ensure that clients have a reserve for later retirement years.

RMDs for Surviving Spouses

A change arising from Secure Act 2.0 that takes effect in 2024 are revised rules for taking RMDs for a deceased spouse’s IRA or other retirement account. Under these new rules, surviving spouses can elect to take RMDs based on the date their late spouse would have been required to have commenced their own RMDs.

This can be beneficial when the deceased spouse was the younger spouse. Another aspect of this rule is that the more favorable Uniform Lifetime Table can be used to calculate these RMDs, generally resulting in a lower distributions amount.

Roger Wohlner

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