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Recent Changes: Required Minimum Distributions on Retirement Plans

March 17, 2021

The last year provided benefits to many people in regards to taking a Required Minimum Distribution. However, the year of waiving RMDs is gone, and in 2021 you may have to take yours.

Last year, the required minimum distributions were waived from qualified accounts such as a 401(k) or IRA. Thanks to the CARES Act, people were allowed to keep their money invested if they did not need it. Unfortunately, the hope for new legislation that will waive RMDs for 2021 is unlikely, but along with their return, they have changed. Now, RMDs are not required until you are 72 (as opposed to 70 previously). If you are unsure of your RMD amount, reach out to your financial advisor to ensure you are withdrawing enough and won't receive any tax penalties.

One exception to the RMD rule has to do with the age you choose to retire. So long as you are working and contributing to an employer plan, are 72 or older, and own less than 5% of the company, you are not subject to RMD requirements. Similarly, if you roll a Roth 401(k) into a personal Roth IRA, you can avoid the required minimum distributions requirements.

If you are actively taking retirement income from your qualified accounts, you may not realize that these distributions are part of your annual RMDs. However, if you have multiple retirement income sources and don't rely on qualified accounts to fund your retirement, you may have ample experience taking an RMD.

Why did the government elect to suspend RMDs last year?

With the onset of COVID-19 and the drop in the market in early 2020, suspending the required withdrawals provided a sense of relief to retirees during the market drop. RMDs are calculated based on a percentage of the total account value at the end of the previous year. A 30% drop in the market during the spring of 2020 would have required retirees to withdrawal a larger amount, not reflective of the losses experienced in the early part of the year.

Until new legislation is passed, you should count on taking your required minimum distribution this year. If you don't, you could be subject to a large tax penalty equal to 50% of your RMD. The rules and regulations around RMDs can be challenging to understand, so we have provided some critical information to keep in mind.

Who has to take RMDs?

Due to the SECURE Act of 2019, the age requirement from RMDs grew from 70 to 72 years old. However, there is still discussion in the government about raising the age to even higher. Yet, this rule only applies to those who were younger than 70 through all of 2019. If not, you were still required to take your RMD as usual by April 1, 2020.

For 2021 you will be required to take your RMD if you meet the age requirements. You do have the option to wait until April 1, 2022, to take your 2021 RMD; however, this may require you to take two distributions in 2022 and force you into a higher tax bracket.

Changing custodians:

Be aware, if the custodian on your account changes mid-year, you will still be required to take your RMD. And if you haven't before the change, your new custodian may not automatically withdrawal your RMD. Be sure to take your RMD before making a custodian change or consult your financial professional to ensure you won't encounter any tax penalties under a new custodian.

Undoing 2020 RMDs:

Thanks to the CARES Act of 2020, it was possible to return your RMD if you had taken it before the legislation was passed. The IRS imposed a 60-day grace period for returns, and if you happened to miss the 60 days, you were able to deem these withdrawals as COVID-related distributions rather than an RMD. This allowed investors to withdraw without penalty and recognize and pay back the income over three years.

When it comes to RMDs in 2021, many financial professionals differ on when to take your distribution. Many believe taking an RMD early, especially if they believe the market to be overvalued, is the best decision. Others think that waiting until the end of the year for new legislation and allowing your money to continue to grow is a better option. The amount of your RMD will not change regardless of when it is taken, as it is based on the ending balance of the previous year. If you have questions about your RMD or investment accounts, contact us today to see how we can help you.