3 Minimum Distribution Requirement (RMD) Rule Changes that Everyone Must Know about in 2025

If you are not aware of these rule changes, you could lose money or face severe penalties.

Contributing to a 401(k) or IRA is one of the best ways to save for retirement. Each year you deposit money into one of these accounts, the government provides a tax deduction equal to the amount deposited. On top of that, dividends or capital gains in that account don't generate taxes when the money stays in the account, which encourages investors to keep their money in these retirement accounts for as long as possible.

Ultimately, however, the government wants to recoup the revenue. That's why traditional 401(k) and IRA account requirements have a minimum withdrawal requirement (RMD). Once you reach a certain age (currently 73), the IRS requires you to withdraw a certain amount from your retirement savings each year and pay income taxes. If you receive money from an inheritance IRA, you may also need to continue withdrawing RMDS.

If the RMD is not withdrawn as required, the penalty can be up to 25% of the amount you should withdraw. In addition, you still need to withdraw the correct amount and pay income tax on that portion. Therefore, it is important to understand these rules. The rules for RMDS have changed significantly in recent years, and 2025 will bring more important changes that all people need to know about and take note of.

1. Roth 401(k) accounts are no longer subject to RMDS

With this change mandated by the SECURE 2.0 Act, Roth 401(k) accounts are no longer subject to the Minimum Distribution Requirement (RMD) as of 2024. With the growing popularity of the Roth 401(k), this new rule is important, especially for investors who want to keep their money in the account for as long as possible to realize tax-free compounding.

Previously, Roth 401(k) accounts, like traditional 401(k) and IRA accounts, required holders to start withdrawing money after they reached a certain age and pay income taxes on the amount withdrawn. Although retirees do not pay income tax on withdrawn funds, they still lose the opportunity to continue to grow those funds tax-free.

To avoid this problem, investors often move their Roth 401(k) to a Roth IRA. However, for those who have never opened a Roth IRA, their Roth IRA may be subject to the five-year rule, which states that investors cannot withdraw earnings from the account for five years after it is opened. This can limit people from withdrawing as much as they wish from their Roth IRA, while keeping money in a Roth 401(k) can result in larger withdrawals than expected.

The new rules treat a Roth 401(k) on an equal footing with a Roth IRA. For those who use their Roth 401(k) as their primary retirement savings vehicle, the RMD is no longer a concern, giving them the flexibility to manage their money in retirement.

2. More inherited IRAs are subject to RMD constraints If you inherit an IRA after December 31, 2019, you may need to withdraw the Minimum distribution Requirement (RMD) starting in 2025.

The SECURE Act states that beneficiaries who inherit an IRA (with a few exceptions) must withdraw all funds from the account within 10 years. Since the regulation was put in place, it is unclear whether those who inherited accounts that were already subject to the RMD will need to continue withdrawing funds under the RMD rules, especially when those beneficiaries must withdraw the funds from the account within 10 years. The Internal Revenue Service (IRS) suspended the requirement between 2021 and 2024, while exempting everyone from RMD obligations in 2020.

However, the IRS officially issued a new ruling in July 2024. With a few exceptions, anyone inheriting an IRA will have to withdraw money in RMDS starting in 2025. If the original account holder dies after the age at which he or she must begin withdrawing funds, the heir is required to withdraw the prescribed minimum amount each year starting in the second year of the inheritance account. At the same time, the 10-year rule is still in effect, and the heir must withdraw the funds from the account by the end of the 10th year after the inheritance.

For many people, taking smaller annual RMD withdrawals after inheriting an IRA is often more advantageous than taking a large lump sum in the tenth year, which can carry a larger tax burden. However, losing the ability to flexibly adjust withdrawals in years of unusually high income could adversely affect some beneficiaries. Therefore, it is important to understand this new rule and how to properly arrange the withdrawal of inherited funds.

3. You can reduce your RMD by up to $108,000

The SECURE 2.0 Act also makes another important change to the Minimum Distribution Requirement (RMD), requiring the Internal Revenue Service (IRS) to adjust the Qualified Charitable Distribution (QCD) limit annually based on inflation. Beginning in 2025, people who are 70 1/2 years of age or older can donate up to $108,000 directly from their IRA to a qualifying nonprofit and count that donation toward their RMD. Regarding Qualified Charitable Giving (QCD), there are several important details to note. First, QCD only applies to IRAs, and funds in other types of retirement accounts, such as a 401(k) or 403(b), are still subject to RMDS unless you transfer those account funds to an IRA. Second, the limit is calculated on an individual basis, which means that you and your spouse can collectively donate up to $216,000 in 2025. So, if you and your spouse both have an IRA, you can each contribute up to $108,000.

It's important to note that the RMD is calculated based on each person's retirement account, so you can't meet your spouse's RMD by withdrawing an oversized QCD from your IRA. Everyone must follow the requirements of their own account.

This change provides retirees with additional charitable giving opportunities to not only help reduce their tax burden, but also support charitable causes they care about. If you plan to take advantage of this new regulation, make sure you understand how to incorporate QCD into your RMD strategy in order to maximize tax savings.

If you are inclined to give to charity, Qualified Charitable Giving (QCD) is one of the best ways to give. Unlike regular distributions, QCD does not count toward your adjusted gross income (AGI) like regular distributions do. Best of all, you don't need to itemize your deductions to get the tax benefits. QCD can save you a lot on taxes because adjusted gross income directly affects your Medicare Part B premiums as well as the taxable portion of your Social Security income.

For many people, the standard deduction ($33,200 for married couples over age 65) typically exceeds the sum of all your other itemized deductions. Therefore, donating money directly from the IRA to an eligible charitable organization will not only help lower the RMD, but also avoid raising your tax burden through itemized deductions.

Even if you don't plan to reach the QCD limit of $108,000 per person, making a donation and reducing your RMD is still a wise choice. In this way, you can lower your tax bill while supporting the charitable causes you care about.

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