RMDs Return for 2021

After being suspended for 2020 via the CARES Act, required minimum distributions (RMD) are back for 2021.

RMDs are required for everyone with a traditional IRA or employer-sponsored plans like 401(k)s or Roth 401(k)s starting at age 72. If you’re turning 72 in 2021, you have until April 1, 2022, to make your RMD. But in each subsequent year, you’ll need to take your RMD by December 31. So that means if you delay taking your first RMD until April 1, you’ll have two withdrawals in 2022 and that could create a higher tax liability.

RMDs are taxable, so plan to have taxes taken out of your distribution to avoid underpayment penalties.

Failing to take your RMD by the due date comes with a 50% penalty. And if you don’t need the money, consider investing the distributions in a taxable account for continued growth or giving the RMD to a qualified charity.

Mind the RMD Gap

The SECURE Act pushes required minimum distributions (RMDs) from an IRA, SIMPLE IRA, SEP IRA or retirement plan account to age 72, up from age 70 1/2. However, you’re out of luck if you are younger than 72 but were 70 1/2 in 2019. You’ll have to begin taking withdrawals by the former age limit of 70 1/2 limit.

Understanding RMDs

Calculate your RMDs by dividing your life expectancy, as determined by the IRS’s Uniform Lifetime Table, into your account balance as of the end of the immediately preceding calendar year. Different rules may apply if your account’s sole beneficiary is at least 10 years younger than you or if you continue working past age 72.

Plan for Withdrawals

When planning your withdrawal strategy, know that you may withdraw more than your RMD each year, but you can’t take less. You can also begin distributions earlier than required.

Talk to your tax and plan professionals to learn more.