401(k) Distributions And Rollover Tips For 2024

Knowing when to access your 401(k) can take significant time and effort.

If you have been socking away funds in this popular tax-deferred vehicle (hopefully with employer-matched contributions), you have amassed an enticing amount for your retirement.

The trouble comes in with understanding just how much of that amount is yours to keep.  As you tread further into retirement there are a couple of important factors to consider when it comes to your tax-deferred accounts.  Understanding the new rules around Required Minimum Distributions (commonly referred to as RMDs) as well as how your withdrawals will be taxed can be daunting.

The SECURE Act 1 as well as SECURE 2.0 both changed the age requirements for RMDs. There is one more change coming to up the age once again to 75. Combined with the elimination of the stretch IRA (inherited IRA), this could mean a much larger tax bill for those looking to pass on an IRA to an heir instead of draining it for themselves during retirement.

In addition to those changes, we are coming up on the expiration of the tax cuts that were part of the Tax Cuts and Job Act. The current tax breaks that retirees are enjoying expire in 2025.

Click here to watch a free online course on taxes in retirement.

For your standard 401(k) your contributions and your employer match were both deposited before tax. This means when you take a distribution from this account you are responsible for paying income tax on that distribution at the tax rate you are currently in.  This means when tax rates increase after the TCJA expires, your tax bill will also increase. 

2024 could be a pivotal year to withdraw if you are looking to capitalize on the current tax cuts.

Required Minimum Distributions simply put mean you are forced to withdraw funds from your tax-deferred accounts each year so that the government can start collecting taxes on those accounts.  The amount you must withdraw is based on your total account value and life expectancy.  The % of your account you must take out increases every year, once you are taking, withdraws. Failure to withdraw the correct amount could result in additional fees tacked on to your tax bill.

For 2024 there are a few notable items one should consider with their tax-deferred accounts.

• RMD age for some is now 73
• RMD withdraws may affect your tax bracket
• Medicare premiums may increase depending on income levels
• RMD penalties can occur if the proper amount is not withdrawn
• Social Security income may count towards your total income when combined with RMD

When you establish retirement accounts the focus often is on growth and saving “enough”. Once you move into living in retirement, however, many may benefit from changing their mindset to focus on having an income plan.  Instead of just looking at what you have stashed away, switch focus to how much monthly/yearly income you need to maintain your current lifestyle.  By understanding your true cost of living and factoring in your retirement goals, such as travel or hobbies, etc, one can get an estimate of what they would need every month to live that lifestyle.  

Once you have an idea of what you need, then you can start putting the puzzle pieces together, this will help provide more clarity on how the above items factor into your plan. You can map out your income including things such as Social Security, Pension payments, RMD withdrawals, dividends, capital gains, and any other income you are receiving.  Taxes are then calculated based on your total income and depending on the total income that will determine how much of your Social Security is subject to taxation.  Up to 85% of your Social Security can be subject to tax.

Florida residents have free educational resources available to them.

Sites such as RetirementTaxMap.com offer a simple calculation to give you an estimate of what your tax bill may be in retirement.

Oxford Advisory Group offers free educational courses in-person through the Greater Tampa, Sarasota, and Orlando areas, along with on-demand online courses that can be found HERE.

With the changes in taxation as well as RMDs this may affect monthly income for retirees. It may be prudent to speak to an advisor who focuses on taxation and retirement income planning such as the founders of Oxford, Christopher Dixon Jr., and Samuel Dixon.

Taxes for retirees may be one of the most impactful elements of a retirement income plan, and failing to plan for the effects may lead to unforeseen results.

Oxford Wealth Group, LLC is a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information about Oxford can be found by visiting the SEC site www.adviserinfo.sec.gov. and searching by our firm name.

This is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may receive this report. The information herein was obtained from various sources. Oxford Advisory Group does not guarantee the accuracy or completeness of information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. Oxford Advisory Group assumes no obligation to update this information, or to advise on further developments relating to it.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.