Remember Required Minimum Distributions and Your Year-End Planning

Certain rules related to required minimum distributions (RMDs) from retirement accounts were relaxed for the 2020 tax year. However, these rules are back in force for the 2021 tax year, and certain taxpayers may need to take action to avoid adverse tax consequences.

What is a Required Minimum Distribution?

RMDs are minimum amounts that retirement plan owners generally must withdraw annually starting with the year they reach age 72, or, if later, the year they retire. However, if the retirement plan is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the owner is age 72 even if they are still working. RMDs not timely withdrawn may be subject to penalties.

Individuals who reach age 72 in 2021 have their first RMD due by April 1, 2022. The RMD rules apply to:

• Owners of traditional IRAs
• Owners of traditional Simplified Employee Pension (SEP) IRAs
• Owners of Savings Incentive Match Plans for Employees (SIMPLE) IRAs
• Participants in various employer retirement plans, including 401(k), Roth 401(k), 403(b), and 457(b) plans

Required Minimum Distributions in 2020?

An IRA owner or beneficiary who received an RMD in 2020 had the option of returning it to their IRA or other qualified retirement plan to avoid paying taxes on that distribution. A 2020 RMD that qualified as a coronavirus-related distribution may be repaid over a three year period or have the taxes due spread over three years.

Here’s how the changes affected the timing of 2020 Required Minimum Distributions.

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Tax Planning for 2021 and Beyond

Individuals who reached age 70-1/2 in 2019 (their 70th birthday was June 30, 2019, or earlier) did not have an RMD due for 2020 but will need to take one by December 31, 2021.

An IRA trustee or plan administrator is responsible for reporting the RMD amount to the IRA owner. An IRA owner or trustee calculates the RMD separately for each IRA. However, owners can choose to withdraw the total amount of RMDs for the year from one or more of the IRAs. On the other hand, RMDs from employer retirement plans must be taken separately from each plan. Not taking an RMD, or not taking the full amount, can result in a 50% excise tax on the amount not distributed.

RMDs are based on a taxpayer’s life expectancy and account balance (typically, as of December 31 of the previous year). An online IRS worksheet can be used to calculate RMDs in most cases.

Why You Need to Be Prepared for Required Minimum Distributions

Significant changes made in 2020 as part of the SECURE Act and the CARES Act could mean RMDs are due for the 2021 tax year even if they were not required for the 2020 tax year. Generally, taxpayers born before July 1, 1949, will have an RMD due by December 31, 2021, meaning immediate action could be required.

Make sure you’re prepared by understanding how required minimum distributions may impact your retirement plans.

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