5 Must-Knows About RMDs as 2024 Winds Down

Key Takeaways

1. Most investors should be bracing themselves for higher RMDs in 2024.
2. Investors can use their RMDs to remove risk from their portfolios.
3. Investors that are 70.5 and older can use QCDs to reduce the tax burden of RMDs before they have to take them.
4. If an RMD is uncomfortably large for what someone would like to withdraw from their portfolio, they can reinvest elsewhere.
5. Even with recent changes under the Secure Act, the penalties of missed RMDs underscore the value of not waiting until the last minute in the year to take that RMD.

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. The clock is ticking on required minimum distributions for this year; you have until year-end to take your RMDs if you’re age 73 or over.

Joining me to discuss what investors need to know about RMDs this year is Christine Benz; she’s Morningstar’s director of personal finance and retirement planning. Christine is also host of The Long View podcast, and author of the new bestselling book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement.

Christine, thanks for being here today.

Christine Benz: Susan, thank you so much. It’s always great to see you.

Brace Yourself for Higher RMDs in 2024

Dziubinski: Your first RMD must-know for this year is that most investors should probably brace themselves for higher RMDs this year than they had in 2023. You also think they should be bracing themselves for higher-still RMDs in 2024. So explain that.

Benz: Your RMD amount is based on the preceding year’s year-end balance. So whatever your balance was at the end of 2023 will determine how much you need to take out this year. Well, 2023 was a really great market for stocks, and bonds performed OK. 2022, which you based your 2023 distribution on, not such a great year. So you probably saw a little bump up. And if you have stocks in your portfolio, you’ve probably seen good gains again this year, so when you go to take your RMDs next year, it’ll be based on that 12/31/2024 balance. For most of us, that’ll be up a little bit. So just be aware that when you’re making money, it means that you need to take more out of those tax-deferred accounts and in turn pay a higher tax bill on them.

How RMDs Can Remove Risk From Your Portfolio

Dziubinski: Now, your next must-know will probably be of interest specifically to the Morningstar.com viewers and your readers, many of whom are of course avid investors. Now, you say that people can use their RMDs to improve their portfolios. What do you mean by that?

Benz: We really like the idea of taking advantage of RMD season to actually take risk out of your portfolio. So, you’re doing a little bit of homework on your portfolio’s asset allocation relative to your targets. You probably see a little bit of divergence because we have had such strong performance in US stocks. You may have a bigger allocation there than you really want to have at this life stage. So, to me, that’s your source of funds for your RMDs. It’s hiding there in plain sight. It’s a way to reduce risk in your portfolio. You can plow those funds into your cash reserves that you’ll use for your spending next year, but it’s a really great way to take some risk out of your portfolio at the same time you’re meeting those obligations and you’re paying the tax bill as well.

How QCDs Can Reduce the Tax Burden of RMDs

Dziubinski: Now, most people assume that RMDs necessarily lead to taxes, which is why so many people don’t actually like them, but there is a way that some can reduce the tax bite through charitable giving, and that’s your next must-know.

So, discuss what’s changing when it comes to qualified charitable distributions in 2024 and how investors can use the QCD even before they’re subject to RMDs, right?

Benz: That’s right. The QCD is available once you are 70.5 or older. Don’t ask me why the disconnect. The old RMD age used to be 70.5, but anyway, the QCD age is 70.5. And the basic idea there is that you are steering a portion of your IRA to the charity or charities of your choice. What’s changing in 2024 is that that dollar amount that’s available to use for a QCD is now $105,000. It had been stuck at $100,000 for several years. So, it’s now being indexed to inflation from here on out. So, we’ll see a little bit of an increase thereafter. If you’re a very large giver, you can take advantage of that full amount where you’re sending the contribution to the charity or charities of your choice. You’re letting your IRA provider work with the charity. You are not taking the check and disbursing it yourself. Be sure to mind your P’s and Q’s on that front. But it’s a really nice mechanism because the amount that you send to charity will both satisfy your RMD and will not pay taxes or will not owe taxes. So, it’s a nice strategy, and people hear this large dollar amount, $100,000, even if you’re a much smaller giver, still consider taking it out of your IRA because it’s a nice way to earn a tax break.

How to Manage Your Portfolio Withdrawals When Taking RMDs

Dziubinski: Your next must-know relates to people whose RMDs push them over what they plan to take out of their portfolios for spending in the given year. What advice do you have for these investors?

Benz: This is the main question I get in the realm of retirement spending. People say, “Well, I’m looking at these RMD tables. My planned withdrawal rate is this. The RMD is going to take me to 6%. And I want to keep it to 4%” or whatever the case might be. And so, my point is: It’s required minimum distribution. It’s not required minimum spending.

So, there’s nothing to say that if your RMD is uncomfortably large for you for whatever reason, you can reinvest elsewhere, usually in a taxable brokerage account, and you could invest in a tax-efficient way within that taxable brokerage account with an eye toward reducing your future tax bills. Or if you are working or your spouse is working, you can even take that distribution and put it into a Roth IRA as long as you have earned income to cover the contribution amount. So, that’s another strategy, although many people at 73 are not working, but your spouse may be. So, take advantage of that because you can reinvest the proceeds from your distribution.

How Investors Can Avoid Missed-RMD Penalties

Dziubinski: Your final must-know relates to the penalties that apply if you miss taking that RMD, and that underscores the value of not waiting until the last minute in the year to take that RMD. Talk a little bit about how those penalties have changed over time.

Benz: For people who like to watch my conversations with Ed Slott, they know that we’ve been over this. So, the Secure Act changed the penalties on RMDs. It had been 50% for many years, so you would owe 50% on the amount that you should have taken but didn’t. In practice, almost no one ever paid that. So, now the penalty is 25% if you miss an RMD and just 10% if you take the distribution within the second year after you missed the RMD. So, the penalties have come down a lot, but what Ed and others say is that the IRS is maybe a little more likely to mean business if someone misses the distribution because the penalties aren’t quite as extreme as they used to be that potentially you could run into them. So, just be super careful. I like the idea of people potentially taking their RMDs earlier if possible just to avoid any potential risk on that front, and really the tax benefits of leaving the funds in a bit longer don’t add up to all that much. So, I don’t see a lot of benefit for delaying, especially if taking it earlier gives you peace of mind.

Dziubinski: Yeah, and checking it off the to-do list for a lot of people like me would be the thing to do.

Benz: Exactly.

Dziubinski: Well, thanks for your time today, Christine, we appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch 5 Financial To-Dos Before the End of 2024 for more from Christine Benz.