Ready, Set, RMDs Are Back On Track For 2021
Submitted by Robert Gordon & Associates, Inc on March 16th, 2021
The year 2020 is one of the most eventful in recent times, and changes to the rules that govern retirement accounts are no exception. One of these changes is the waiver of required minimum distributions (RMDs) for 2020. As a result of this waiver, you are not required to take RMDs from your IRA for 2020. But if you are of RMD age in 2021, you must resume RMDs for 2021 and continue for every year after. RMDs were waived for beneficiary IRAs as well and will need to resume in 2021 for certain beneficiaries.
Reminder: RMDs do not apply to Roth IRA owners.
RMDs- A Mild Refresher
An RMD is a minimum amount that you must distribute (or withdraw) from your retirement account for any RMD year. You can always distribute more if you want to; however, a distribution of less than your RMD amount will result in you owing the IRS an excess accumulation penalty of 50% of the RMD shortfall. For example, if your RMD for 2021 is $20,000 and your 2021 IRA distributions total only $12,000, you will owe the IRS an excess accumulation penalty of $4,000 [($20,000 - $12,000) x 50%].
If you are required to take an RMD for 2021, your IRA custodian will send you an RMD notice by January 31, 2021. This will include your calculated RMD amount or an offer to calculate the amount upon request. This requirement does not apply to beneficiary IRAs.
New RMD Age- A Reminder
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, a new law passed in 2019, increased the RMD beginning age for IRA owners from age 70 ½ to age 72. As a result of this change, any IRA owner who reached age 70 ½ by December 31, 2019 – those born June 30, 1949, or earlier – must begin taking RMDs for the year he or she reaches age 70 ½ and continue for every year thereafter (except for 2020- where RMDs are waived). IRA owners who reach age 70 ½ after December 31, 2019, must begin RMDs for the year they reach age 72.
You Must Take an RMD For 2021 If…
Whether you must take an RMD from your IRA for 2021 depends on factors that include whether it is your own IRA and your age in 2021, or if it is a beneficiary IRA, and if so, when the IRA was inherited.
Your own IRAs: For 2021, you must take an RMD from your own (non-beneficiary) IRA for 2021 if you were 70 ½ or older on December 31, 2019, as you would have already started your RMDs and are required to continue. And, you would be required to take an RMD for 2021 if you were born at any time in 1949 or earlier, as this means that you would be at least age 72 on December 31, 2021.
If you were born 1950 and after, you would not be subject to RMDs for 2021 because you would not have reached age 70 ½ by December 31, 2019 and you would be under age 72 as of December 31, 2021.
Your beneficiary IRAs- including beneficiary Roth IRAs: For beneficiary IRAs, whether you must take an RMD for 2021 depends on several factors that you will want to discuss with your CFP® professional to see if they apply.
New Rules for 2022 And After
Your RMD for the year is determined by your distribution factor- which is based on your age as of the end of the RMD year, and the fair market value of your IRA balance for the preceding year. Effective for distributions made after 2021, a new table must be used, resulting in smaller RMD amounts. The updated IRS Life Expectancy Tables can be found here.
Professional Assistance Helps To Avoid Penalties
The rules explained above are very high-level. Professional assistance is often needed to ensure that any caveats are properly applied- thus avoiding any risk of IRS penalties.
Additionally, you might need to take RMDs from accounts under employer plans- such as 401(k) and 403(b) plans. If you have assets under an employer plan, contact the plan administrator or your HR department regarding their RMD policies- to determine if they will automatically distribute your RMDs or if you are required to submit RMD instructions. If you plan to roll over amounts from these accounts, consult with your advisor to help to ensure that RMD amounts are not included in any rollover.
