Required Minimum Distributions (RMD's) For 2021: Here's What's Changing
The US Government helpfully suspended RMD's amidst COVID-19. With the economy reopening and life returning to normal, RMD's are back! Some of the changes from 2020 carry over for 2021, which we will detail below.
What Are RMD's?
A required minimum distribution, or RMD, is a minimum amount of money one must withdraw from their IRA each calendar year after reaching a specific age.1
The amount of a required minimum distribution is calculated by dividing the following two values from one another:1
- The total account balance of an IRA in the previous calendar year, divided by
- A value, determined by the IRS’s “Uniform Lifetime Table.”
The final amount is the minimum amount that must be withdrawn. However, it should be noted that calculating minimum distribution requirements should be handled by financial professionals, as a failure to withdraw an RMD can result in a 50 percent tax penalty.1
Retirement Plans Affected by RMDs
The following retirement plans will be affected by the new RMD requirements:1
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
- Profit-sharing plans
- Other defined contribution plans
Changes to RMDs in 2021
RMDs have changed in a few ways in 2021. First, following the SECURE Act, the required age of RMDs increased from 70 and a half to 72 in 2020.2 If you will be turning 72 in 2021, and this is your first RMD, then you will have until April 1, 2022, to make your minimum withdrawal instead of the standard date of December 31 of each year. Additionally, the CARES act waiver no longer applies to 2021, meaning RMDs must be taken by the end of the year to avoid the 50 percent tax penalty.
RMDs and Inherited IRAs
When an IRA is inherited, the inheritor becomes a beneficiary and must still take RMDs.2 However, how these RMDs are processed will depend on the date of the original account owner’s passing and the type of beneficiary receiving the account.2 It's pretty complex!
The type of beneficiary depends on multiple factors, such as relationship to the original account owner and state of residence.3 Though, in general, spouses and other eligible beneficiaries may be allowed to take RMDs over their lifetime, while other beneficiaries will need to follow the 10-year rule, withdrawing the entire account within 10 years.2
Of course, this is a general approach and alternatives do exist. Therefore, beneficiary type and RMDs should be determined by an advisor or other financial professionals before any actions are taken.
The way RMDs are processed may have changed this year. But by keeping this information in mind and consulting a financial professional, you can work to make sure your RMDs are withdrawn and calculated properly, without worrying about the potential tax penalties.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.