In the midst of a gloomy 2020, there were a few bright spots. One of those being the opportunity to forego your required minimum distribution (RMDs) for the year. The CARES Act enacted in March 2020 waived RMDs for most retirement accounts, including inherited IRAs, but they are back in play for 2021.
In our 12 Actionable Tips Before Year-End blogpost from last year, we advised our readers to consider “turning off” their automatic required minimum distributions if the funds were not needed for ongoing living expenses. As we prepare for the end of the year, we are reminding those who did follow our advice to ensure your RMDs are turned “back on” and are fully withdrawn by December 31st (and we are sending this reminder out now to avoid waiting until the last minute!).
A Refresher
A required minimum distribution is a type of withdrawal that you must take from certain retirement accounts once you turn 72. If you do not take out at least the required minimum, you will face a stiff 50% penalty on the amount shortfall. For example, if your RMD is $50,000 and you only withdraw $40,000, your excess accumulation penalty will be $5,000 [($50,000 - $40,000) x 50%] However, remember that RMDs do not apply to Roth IRA owners but they do apply to those with Roth 401(k)s and inherited Roth IRAs.
New RMD Age
Enacted in 2019, the SECURE Act increased the RMD beginning age from 70 ½ to 72. As a result, anyone born before January 1, 1950, must take an RMD by the end of the year (2021). However, if you did turn 72 this year, you can wait until April 1, 2022, to satisfy your RMD requirement, though it is not always recommended due to the two RMDs you’ll be required to take in 2022. So, if you were born in 1950 or after, you can hold off for at least one more year!
New RMD Tables on the Way
The IRS issued new life expectancy tables in 2020 used for determining RMDs in 2022 and beyond. While the new tables are not effective for this year’s RMD calculations, the updated tables and factors will generally result in smaller RMDs and the retention of greater amounts in your accounts for longer life spans. As an example, the distribution “factor” for a 75-year-old will increase from 22.9 to 24.6 on the IRS Uniform Lifetime Table, meaning a $100,000 account will be required to distribute $4,065 ($100,000/24.6) instead of $4,367 ($100,000/22.9) after 2021, approximately a 7% decrease.
Need a Hand? Let us help.
While the summary above covers some basics, it is important to avoid the risk of running afoul of the IRS. IRA custodians often provide an RMD calculation based upon information that they have about you and your account; however, it is always wise to have a financial professional review those calculations.
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The information in this article is not intended as legal or tax advice. Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation.
