The Internal Revenue Service (IRS) has disclosed that retirees are required to take out increased amounts from their retirement funds this year because of the unprecedented stock market rises in 2023. According to Fidelity Investments, the total required minimum distributions (RMDs) are set to surpass $25 billion in 2024, marking an all-time high. RMDs signify the minimum amount that retirees must pull from their retirement plans, including IRAs and 401(k)s, on an annual basis.
The SECURE 2.0 Act, which was enacted the previous year, has raised the starting age for retirees to begin taking RMDs from 72 to 73. Rita Assaf, who serves as vice president of retirement products at Fidelity, mentioned, “As additional clients reach eligibility and the market culminates on December 31, 2023, we anticipate that RMDs in 2024 will set a new record.”
It is essential for retirees to note four important considerations about RMDs:
- RMDs are considered ordinary income and may elevate retirees to a higher tax bracket, raise their Medicare premiums, and influence other tax benefits.
- Neglecting to withdraw RMDs or taking out less than required can lead to a 25% penalty on the unwithdrawn amounts. This penalty may be mitigated if the error is rectified within a two-year timeframe.
- While retirees cannot escape RMDs, they do have the option to reinvest the funds or place them in a high-yield savings account to accumulate interest.
- 4. RMDs do not apply to Roth IRAs, except when they are inherited from another individual.
Contributions to Roth IRAs are made with after-tax income, and any investment earnings are tax-exempt if the account holder is aged at least 59½ and has maintained the account for a minimum of five years. Retirees need to ensure they complete their RMDs by December 31 each year following their 73rd birthday. It is imperative for retirees to grasp these concepts to make knowledgeable decisions concerning their retirement income and circumvent possible penalties.
