Most people don't spend a lot of time thinking about required minimum distributions (RMDs) rules. Your retirement plan custodian or administrator keeps up with all the changes, calculates your RMD, sends you notices, and automatically withdraws the correct amounts from your account on time.
Still, it's worth a quick review of the RMD basics, and to at least be aware of the recent changes. RMDs were eliminated in 2020 but they're back on in 2021. If you're not positive, now would be a good time to double check your status before the end of the year. You don't want to miss an RMD deadline because there are hefty 50% IRS penalties on unwithdrawn amounts.
What Are Required Minimum Distributions?
A required minimum distribution (RMD) is an amount that the IRS makes you withdraw each year from your IRA or your employer-sponsored retirement plan. In a nutshell, the purpose of an RMD from the IRS perspective is to limit accumulation of excess tax deferred money that can be passed on as an inheritance rather than used up in retirement.
The SECURE Act
The Secure Act of 2019 made major changes to the rules governing required minimum distributions. The biggest change was increasing the age for RMDs from 70 1/2 to 72.
An individual who turned 70 1/2 before December 31, 2019 (ie born before July 1, 1949) is subject to the old rules. An individual who has not yet turned 70 1/2 before December 31, 2019 (ie born on or after July 1, 1949) is subject to the new rules.
Note: After the first-time RMD (due by April 1st), subsequent year's RMDs are due by December 31st every year thereafter. That means if an individual delays their first-time RMD until the April 1st due date, they would have two taxable withdrawals due in a single tax year. The additional income from double RMDs can have adverse tax consequences. So depending on the circumstances, many individuals choose to take their first-time RMD by December 31st of the beginning year rather then delaying it until April 1st of the following year. Speak to your tax advisor.
Calculating RMD Amounts
An RMD is calculated using the closing balance in the retirement account from the prior year, and one of the life expectancy factors published by the IRS. There are a couple of additional considerations, but the calculation for a traditional IRA, SEP, or SIMPLE is not complex. Kiplinger has a simple online RMD calculator here.
The CARES Act
The CARES Act of 2020 eliminated all RMDs for IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit sharing plans, and other defined contribution plans, but only for 2020.
The change affects any first-time 2019 RMD delayed until April 1st, 2020. Under the CARES Act, both the April 1st and the subsequent December 31st RMDs for first-timers are eliminated. Lucky you. In that situation, you would just have a single first-time RMD due by December 31st, 2021.
RMDs taken in 2020 despite the CARES Act elimination (or perhaps before the CARES Act was signed in March 2020) were eligible for a "rollback" into the original plan or a rollover into another qualified retirement plan with no tax consequences. Normally RMDs do not qualify for rollovers.
2021 RMDs Are Back
Bottom line, if you were taking RMDs before 2020, you will need to resume taking them by December 31st, 2021.
If you had a first-time 2019 RMD that you delayed until April 1st, 2020 and a subsequent RMD due by December 31st, 2020 that were both eliminated by the CARES Act, you will need to take a single first-time RMD by December 31st, 2021.
If you were born on or after July 1, 1949 (subject to the new RMD age rules) and you turned 72 in 2021, then you will need to take your first-time 2021 RMD by April 1st, 2022. A subsequent 2022 RMD will be due by December 31st, 2022.
If you want to avoid double RMDs in 2022, take your first-time RMD by December 31st, 2021.
Failure to take an RMD by the deadline can result in a steep 50% penalty on the unwithdrawn amount.
These are just the highlights of a complex set of tax code provisions around retirement accounts, required minimum distributions, rollovers, conversions, and recharacterizations. As always at Monadnock Tax Services we are happy to help individuals and families with friendly tax advice and services. Give us a call at (603) 722-0184 or email info@monadnocktax.com
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