For most federal employees and retirees, this is a busy time of the year. There is much to do because of the holiday season and parties to attend with friends and family. But for some retirement account owners and beneficiaries, December 31, 2024 is an important deadline. December 31,2024 is the deadline to take 2024 required minimum distributions (RMDs) for some federal employees and federal retirees.
This column discusses which employees and retirees must take an RMD for 2024 with a strict deadline of December 31, 2024.
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Retirement Account Owners – Qualified Retirement Plans and Traditional IRAs
The following qualified retirement plan participants must take an RMD for 2024: Federal employees and retirees who previously participated in a 401(k), 403(b), or 457 qualified retirement plans and who are age 74 or older in 2024. RMDs must be taken from each of those qualified retirement plans.
Those federal retirees aged 73 and older who are TSP participants would have already taken their 2024 TSP RMD. According to TSP rules, a retired TSP participant who has reached their required beginning date (age 70.5, 72 or 73 depending in which year the retired TSP participant was born) must take their TSP RMD by the first week of December. In case the TSP participant has not taken the RMD by that time, the TSP will automatically withdraw the RMD and deposit it into the TSP participant’s bank account.
The following traditional IRA owners must take an RMD for 2024: Traditional IRA, traditional SEP-IRA and traditional IRA-SIMPLE owners who are age 74 or older during 2024. It makes no difference whether the traditional account owner is in federal service or has retired from federal service.
Those traditional IRA owners who reached age 73 during 2024 – they were born between January 1,1951 and December 31,1951 – catch a break. They do not have to take their 2024 traditional IRA RMD until April 1, 2025. However, if a traditional IRA owner waits until 2025 to take his or her 2024 traditional IRA RMD, then the traditional account owner will need to take two RMDS in 2025 – one for the 2024 traditional RMD and one for the 2025 traditional RMD (that must be taken by December 31, 2025).
There are no RMDs when it comes to owners of Roth IRA accounts. This applies to both Roth IRAs and qualified Roth retirement accounts, including the Roth TSP. A federal employee/retiree who owns a Roth IRA or a Roth TSP account will never be required to take RMDs from either account during their lifetime.
Planning Points for Federal Employees and Retirees Who Previously Participated in Qualified Retirement Plans
Those federal employees and retirees who previously participated in a qualified retirement plan (such as a 401(k), 403(b), or 457 retirement plans) when they worked in private industry may want to directly rollover their accounts into the TSP. In so doing, they will consolidate their retirement accounts and most importantly, they will have to take only one RMD from the TSP upon reaching their required RBD, age 73 or 75, depending which year they were born and have retired from federal service. This also applies to federal employees who reached their RBD this year and who intend to remain in federal service for the next few years.
Federal employes who are interested in directly rolling over their qualified retirement plans and traditional IRAs into their traditional TSP accounts may do so by going online to their TSP account and filling out and submitting Form TSP-60 (Request for a Transfer into the TSP).
Retirement Account Beneficiaries – Traditional IRAs and Roth IRAs
Many traditional IRA and Roth IRA beneficiaries need to take their 2024 RMD by December 31, 2024. These IRA beneficiaries are:
1. Beneficiaries of traditional IRAs and Roth IRAs in which the IRA owner died before January 1, 2020. IRA beneficiaries of IRAs in which the IRA owner died before January 1,2020 had the option of using the inherited IRA “stretch provision” to receive their inherited IRA accounts. The “stretch provision” means that the IRS beneficiary receives a lifetime distribution of the inherited IRA based on the beneficiary’s life expectancy. Every year the IRA beneficiary must take an RMD. The RMD is computed every year by taking the IRA’s account balance as of December 31 of the preceding year and dividing that balance by the beneficiary’s life expectancy that year. The following example illustrates:
Example 1. William, age 57 during 2024, inherited his father’s traditional IRA when his father died in May 2019. William has been taking an RMD from his inherited IRA every year since 2020. On December 31, 2023, William’s inherited IRA balance was $217,480. William’s single life expectancy (age 57) is 29.8 years (obtained from the IRS Single Life Expectancy Table). William’s 2024 inherited IRA RMD (due by December 31, 2024) is equal to:
$217,480/29.8 = $7,297.99
Eligible designated beneficiaries of traditional and Roth IRAs in which the IRA owner died after December 31, 2019. An eligible designated beneficiary (EDB) is a: (1) Surviving spouse of the IRA owner; (2) Disabled or chronically ill individual; (3) Minor child of the IRA owner; or (4) Any other individual no more than 10 years younger than the IRA owner. An EDB must take an RMD each year based on the inherited IRA balance on December 31st of the previous year. The following example illustrates:
Example 2. Carol, age 47 during 2024, inherited a traditional IRA from her sister Judy when Judy died in 2021 at age 41. Carol was aged 44 in 2021 when she inherited the traditional IRA. Carol’s inherited IRA was worth $186,700 on December 31, 2023. Carol computes her 2024 inherited IRA as follows:
$186,700 (account balance as of 12/31/2023)/39.0 (single life expectancy age 47)
= $4,787.18
Carol must take her 2024 RMD equal to $4,787.18 no later than December 31, 2024.
Although Roth IRA accounts are not subject to an RMD requirement while the Roth IRA owner is alive, annual Roth IRA RMDs do apply to Roth IRA beneficiaries who inherited Roth IRAs from Roth IRA owners who died before January 1,2020 and to Roth EDBs who inherited Roth IRAs after December 31,2019 and who have chosen the “stretch option”.
IRA beneficiaries who are “non-designated beneficiaries” (NEDBs) are subject to both the 10-year rule under the SECURE Act and the final RMD regulations requirement that annual RMDs must be taken during the 10-year period. The 10-year period concludes on December 31 of the 10th year following the year of death of the IRA owner.
There has been much confusion over the rules for NEDBs. The IRS consequently waived the RMD requirement for the years 2021, 2022, 2023. This waiver applies only to NEDBs who inherited IRAs after December 31,2019. The IRS waived the RMD requirement for NEDBs also for 2024. But starting in 2025, NEDBs are required to take their RMDs.
However, although NEDBs are not required to take their RMD during 2024, they are encouraged to withdraw something from their inherited traditional IRAs before December 31, 2024. This is because the larger the account balance on December 31, 2024, the larger the 2025 RMD will be. With a larger traditional RMD, more federal and state incomes taxes will have to be paid.
Finally, those NEDBs who are not subject to annual RMDs are also encouraged to make a withdrawal from their inherited traditional IRA before December 31, 2024. Postponing withdrawals from an inherited IRA until the end of the tenth year following the death of the traditional IRA owner could result in a huge lump-sum withdrawal that will most likely trigger a huge federal (and state) tax liability.
When it comes to an inherited Roth IRA, it is just the opposite. Since the inherited Roth IRA withdrawals are tax-free, an inherited Roth IRA beneficiary is encouraged to withdraw the entire Roth IRA at the end of the tenth year following the year of death of the Roth IRA owner. This will allow for additional tax-free compounded growth in the inherited Roth IRA.