The Tax Blotter is a round-up of recent tax news, briefs, and court rulings.
Generally, you must begin taking required minimum distributions (RMDs) from qualified plans, like 401(k) plans, and traditional IRAs, subject to special rules,
Age before beauty. Under SECURE Act 2.0, participants in 401(k)s and IRAs must begin taking RMDs by April 1 of the year following the year in which they attain age 73, up from age 72. Thus, if you turned 73 in 2024, the deadline is April 1, 2025. If you’re turning 73 in 2025, you have until April 1, 2026, to begin RMDs, but you may want to start in 2025. Then you can avoid RMDs for both the 2025 and 2026 tax years being taxed in 2026, which could increase your overall tax liability. Note: SECURE 2.0 hikes the age threshold to 75 in 2033.
Ten years after. For 401(k)s and IRAs inherited after 2019, most nonspouse beneficiaries have to empty out the accounts over ten years. If the deceased person was already taking RMDs, the beneficiary must withdraw annual RMDs based on their own life expectancy. Due to confusion over the rules, the ten-year requirement was waived by the IRS for the 2021-2024 tax years for account owners dying in 2020-2023. But now annual RMDs are required, beginning with the 2025 tax year. Note: If you inherited a Roth IRA after 2019, you must comply with the ten-year rule, but you don’t have to take annual RMDs.
Take exception to the rules. Typically, you can’t avoid the RMD rules once you attain the specified age threshold, but there’s a special exception for 401(k) and other qualified plan participants who are still working at a job. If you currently don’t own 5% or more of the company, you can delay RMDs until you decide to call it quits for good. This may benefit small business owners who have handed over the reins to the younger generation or are doing consulting work relating to the sale of their operation. Note: The “still working exception” doesn’t apply to IRAs.
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Tags: Taxes
