Amid the hustle and bustle of the holiday season, don’t forget about required minimum distributions from your retirement accounts.
After being waived for 2020, those RMDs — amounts you must take each year from most retirement accounts once you reach a certain age — are again in force for 2021.
That’s sandwiched between the RMD age changing to 72 from 70½ as of last year and new IRS life expectancy tables — which are used to calculate those withdrawals — going into effect next year.
RMDs apply to 401(k) plans — both traditional and the Roth version — and similar workplace plans, as well as most individual retirement accounts. Roth IRAs have no required withdrawals until after the account owner’s death.
If you had hit age 70½ before 2020, RMDs kicked in at that point. If you reached (or will reach) that age in 2020 or later, you get more time: Those withdrawals are required to start at age 72.
In other words, “Anyone born July 1, 1949, or later can wait until they’re 72,” said Ed Slott, CPA and founder of Ed Slott and Company.
The amount you must withdraw each year is generally determined by dividing the balance of each qualifying account by a “life expectancy factor” as defined by the IRS.
For example, if you’re 75, that number would be 22.9, according to the IRS. Divide your account balance — say it’s $100,000 — by that factor and your RMD would be about $4,366. So if your balance is $500,000, your RMD would be five times that, or roughly $21,830.
You can delay your first RMD until as late as April 1 of the year following the one in which you reach the RMD age. In all subsequent years, you must take the required amount by Dec. 31. If you don’t make those RMDs, you could face a 50% penalty.
However, if you’re working and contributing to a retirement plan sponsored by your employer (and don’t own more than 5% of the company), RMDs do not apply to that particular account until you retire.
Those waived 2020 RMDs
Generally speaking, if you already were taking RMDs before 2020 — i.e., you had already reached age 70½ — you would simply resume those distributions this year, using the current life expectancy tables, your age and your account balance at the end of 2020, Slott said.
“Some may be surprised and find their RMD is bigger,” Slott said. “Their balance on Dec. 31, 2020, may have been much higher [from stock market gains], so their RMD is higher.”
If you turned 70½ in the first half of 2019 and planned to take advantage of the April 1, 2020, deadline for taking out the RMD — and did not do it due to the federal waiver — this will be your first year of taking RMDs, Slott said. It must be taken by Dec. 31.
“They caught a break by procrastinating,” Slott said. “Their first two RMDs were waived, so this will be their first year of taking it.”
If you turn 72 this year, you have until April 1, 2022, of course, to take your 2021 RMD. Be aware, however, that delaying it would not mean it can be subject to the updated life expectancy tables that take effect next year, Slott said. Your 2022 RMD would use the new measurements.
“You’d have two tables to use: the current table for the 2021 RMD and the new one for the 2022 RMD,” Slott said.
Be aware that you must calculate the RMD for each retirement account subject to the withdrawal rules.
For inherited IRAs, 401(k) plans or other qualified retirement accounts, the balance must be entirely withdrawn within 10 years if the owner died after 2019, unless the beneficiary is the spouse or other qualifying individual. The 2019 Secure Act eliminated the ability of many beneficiaries to stretch out distributions across their own lifetime if the original account owner died on Jan. 1, 2020, or later.