With Less Than Three Months Remaining in 2024, Now is the Time for TSP and IRA Planning

What Are the Rules Regarding Traditional IRA Beneficiary RMDs for 2024?

There is confusion with respect to traditional IRA beneficiary IRAs. In IRS Notice 2023-54, the IRS waived 2023 RMD beneficiaries of inherited traditional IRAs subject to annual RMDs withing the 10-year payment period. During 2022, IRS Notice 2022-53 waived 2021 and 2022 RMDs for beneficiaries of inherited IRAs. Finally, SECURE Act Regulation 7-18-24 waived 2024 RMDs for beneficiaries of inherited RIAs. But Regulation 7-18-24 also included the law that starting in 2025, RMDs for beneficiaries of inherited IRAs must begin and all inherited traditional IRAs must be withdrawn no later than December 31 of the tenth year following the death of the traditional IRA owner. Traditional IRA beneficiaries are advised to withdraw every year from their inherited IRAs and not wait until the end of the 10th year to receive a lump sum distribution of an inherited IRA. This is because a lump sum distribution could result in a huge tax liability. Therefore, inherited traditional RIA beneficiaries are encouraged to take an RMD each year, starting in 2024 and not wait until 2025 to take their first RMD. The deadline for taking the 2024 traditional IRA beneficiary RMD is December 31, 2024.

Note that neither eligible designated beneficiaries (EDBs) nor traditional IRA beneficiaries who inherited traditional IRAs before January 1,2020 are affected by any of the IRS Notices and Regulations issued during 2021 -2024. Both EDBs and beneficiaries of traditional IRAs whose owners died before January 1,2020 must take their 2024 RMD no later than December 31, 2024.

Qualified Charitable Distributions (QCDs)

QCDs are an advantageous way for individuals who are charitably inclined to meet their annual RMD. With a QCD, a traditional IRA owner can make a 2024 charitable contribution to a qualified charity of up to $105,000. The charitable contribution is made directly from the individual’s traditional IRA through a tax-free transfer from the traditional IRA to a qualified charity.

Note a QCD cannot be made from the traditional TSP. But a traditional TSP participant who is age 70.5 or older can request a direct rollover of a portion of his or her traditional TSP account to a traditional IRA. Upon deposited into the traditional IRA, the traditional IRA owner can request a QCD of up to $105,000 during 2024. While the QCD is not deductible for income tax purposes, the QCD can be used to meet the traditional IRA RMD and the QCD is nontaxable. This is true only if the traditional IRA owner has reached his or her RBD. By transferring funds out of the traditional TSP to the traditional IRA, the traditional TSP account balance will decrease, resulting in decreasing future traditional TSP RMDs.

Since there does not exist a “prior-year” QCD, those individuals aged 70.5 and older during 2024 must be careful to complete their 2024 QCDs – maximum QCD is $105,000 – no later than December 31, 2024. When performing a QCD, it is important for the traditional IRA owner to leave a sufficient amount of time for the traditional IRA custodian to send the QCD to the qualified charity before the December 31,2 024 deadline.

Roth IRA Conversions

The Tax Cuts and Jobs Act of 2017 (TCJA) lowered individual tax rates to the lowest they have ever been. The low tax rates will remain low through December 31, 2025, when the TCJA is due to expire. Unless Congress renews TCJA, individual tax rates will revert back to what they were in 2017, inflation adjusted. This means that between now and December 31, 2025, converting traditional IRAs to Roth IRAs could be a wise financial move for many traditional IRA owners. Converting a traditional IRA at a lower individual tax rate now, compared to not converting and then withdrawing from the traditional IRA later at a higher individual tax rate, could result in overall tax savings.                                                                                                  

Another benefit of converting a traditional IRA to a Roth IRA is that unlike a traditional IRA, a Roth IRA is not subject to RMDs. When the traditional IRA owner reaches his or her RBD, the owner must take an RMD each year.

In order to qualify as a 2024 Roth IRA conversion, the converted traditional IRA funds must leave the traditional IRA no later than December 31, 2024. There is no such thing as a ‘prior year” Roth IRA conversion. Roth IRA conversions are taxable in the calendar year of conversion and cannot be reversed.

Traditional IRA owners must make sure that they have a sufficient amount of liquid assets – passbook savings account or money market funds – in order to pay the federal (and in states with income taxes, state) income taxes due on conversion before they convert. This is because in a conversion, the IRA custodian will not withhold federal and state income tax. For conversions performed during the last quarter of 2024, it is likely that estimated federal and state income taxes will have to be paid. Fourth quarter of 2024 federal and state estimated tax payments must be paid no later than January 15, 2025. Traditional IRA owners are advised to work with their tax advisors when they perform Roth IRA conversions in order to ensure that they are paying the correct amount of fourth quarter 2024 federal and state estimated taxes.

It is also recommended to wait until early December 2024 to perform Roth IRA conversions. By waiting until early December 2024 to perform the conversion an individual will have a better idea of their 2024 federal and state income tax liabilities. However, a traditional IRA owner should not delay the Roth IRA conversion into late December. Some traditional IRA custodians will not process 2024 Roth IRA conversions after a specific date in December in order to guarantee that the conversion will be completed by December 31, 2024.