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How New Required Minimum Distribution (RMD) Rules for 2024 Affect Estate Plans

Calculator, paperwork, and two people writing representing RMDs and taxes for blog post on new Required Minimum Distribution amounts

Retirement accounts are widely-used options for retirement savings and deferring taxes. Unfortunately, retirement account funds aren’t tax free indefinitely. These types of accounts come with Required Minimum Distributions (RMDs), meaning account holders must withdraw a minimum amount of their funds after reaching a specified age. RMDs impact retirement accounts in estate plans and the beneficiaries of those accounts. Consider RMDs when you create or update an estate plan.

In 2023, the SECURE 2.0 Act changed the age for starting RMDs (Required Minimum Distributions) to 73, and in 2033, the age will change to 75. Depending upon your income from RMDs and other sources, premium costs for Medicare could increase once withdrawals begin, and taxes may also be higher, reports the article “Don’t Overlook These New RMD Rules for 2024” from U.S. News & World Report.

How Retirement Accounts Impact Estate Planning

Estate planning isn’t reserved for wealthy Minnesotans. Anyone can protect their property and assets, plan for the unexpected, and support financial long-term needs. Estate plans often include retirement accounts, and should have a strategy to account for RMDs while you manage account distributions and once your beneficiaries do.  Read about personalized estate planning in our blog, Estate Planning for Blended Families in the Twin Cities.

RMDs are required distributions taken from traditional IRAs and 401(k)s after a certain age. There are expensive consequences for missing withdrawals, and some guidelines relating to charitable giving and Roth 401(k) RMDs. You can plan ahead and choose different options or strategies that address RMD requirements.

RMDs are calculated on the prior year’s account balance on December 31, so delaying an RMD isn’t always the best strategy. Having to take two RMDs in the same year will mean, in most cases, the RMD will be slightly higher for year two.

Deadlines are important to know. You may get a little more time to take your first RMD. However, subsequent RMDs must be taken each calendar year. If you’re celebrating your 73rd birthday in 2024, you have two choices: you can take your first RMD by December 31, 2024, or you can choose to wait until April 1, 2025. However, if you decide to wait until April, you’ll have to take a second RMD by December 31, 2025.

You’ll face penalties if you fail to take an RMD at the right time. Before the SECURE Act 2.0, the tax penalty was 50% on the required amount not withdrawn. If you failed to take an RMD of $2,000, you’d need to pay $1,000 in penalties. The penalty is now 25%. If you miss a $2,000 RMD, the penalty will be $500. However, if the error is corrected within two years, the penalty drops to 10%, so it pays to address the issue. In some cases, if you can prove the RMD was due to a mistake and demonstrate that reasonable steps were taken to address the issue, the IRS might waive the penalty.

Other Tax Considerations in Minnesota Estate Planning

RMDs and other taxes are important factors shaping your estate plan as a Minnesota resident. Estate planning with an experience attorney in Minnesota will give you a plan that addresses and minimizes estate tax implications.

Navigating Minnesota’s intricate federal and estate taxes can be daunting and lead to costly missteps. Exemptions are a complex area that needs a profound understanding of exemption amounts, which wield significant influence in tax planning strategies. Exemptions are key guides in alleviating the weight of Minnesota’s estate tax. Minimizing tax liabilities is a must in any estate plan. 

For example, what you pay for Medicare Part B and D premiums is related to income. If you delay taking withdrawals until age 73, your income could be lower, and your premiums could be less. Once you start taking RMDs, your income may go up, and Part B and D premiums may be more expensive.

Book a Call with our Minneapolis estate planning team to learn more about how taxes on your retirement income will impact your financial and estate planning. There are several strategies which may be appropriate for your needs.

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