RMDs are Back in 2021

The IRS waits patiently during our working years as we add to our retirement savings held in Individual Retirement Accounts (Traditional, SEP and SIMPLE IRAs) and employer sponsored retirement plans like 401(k), 403(b) and government 457(b) plans. There comes a time, however, when the tax bill comes due and the IRS wants to begin receiving some of the taxes long deferred during our working years.  Thus, comes the term Required Minimum Distributions (RMDs) which are defined generally “as the minimum amounts that a retirement plan account owner must withdraw annually starting with the year in which he or she reaches age 72.” The amount required to be withdrawn is determined and calculated by the IRS. Examples of computed rates of withdrawal (%) are at age 72 (3.90%), age 80 (5.34%) and age 90 (8.77%). It makes sense that as we age and our life expectancy shortens that the rate of withdrawal must also increase. Remember, if you have multiple IRAs or retirement plans you must calculate the RMD separately for each account, though you may aggregate all of your RMD amounts for your IRAs and withdraw the total from one IRA or a portion from each of your IRAs.  Although an IRA custodian or retirement plan administrator may calculate your RMD amount, it remains your responsibility to both calculate and withdraw the correct RMD amount each year. What is the penalty for not making the required RMD withdrawal from your retirement account? A steep tax equal to 50% of the amount that should have been withdrawn. 

Regulations regarding RMDs have undergone some changes over the past year. On December 20, 2019 the Setting Every Community Up for Retirement Enhancement Act (SECURE) provided new legislation that impacted IRAs, employer sponsored retirement plans and Section 529 college savings plans. Specific to RMDs, the Secure Act increased the age when RMDs must begin from age 70.5 to 72. Inherited IRAs, which have a different and more complex set of withdrawal rules, were also impacted by this Act. Beginning in 2020, there will no longer be RMDs for Inherited IRAs, however, the entire account must be distributed by the end of the 10^th year following the death of the owner. Exceptions to the new 10 year draw down are surviving spouses, minors, beneficiaries less than 10 years younger than the decedent and disabled or chronically ill beneficiaries.  On March 27, 2020 President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES) with the intended purpose of reducing the economic impact of the Covid 19 pandemic. The CARES Act removed (waived) the RMD requirement in 2020 for people 72 and older and this waiver also applies to IRA owners who turned 70.5 in 2019, since they otherwise would have been required to start taking RMDs by April 1, 2020. This Act also states that if you did not take your RMD in 2020, you will not be subject to the 50% penalty normally levied by the IRS. What if you received your 2020 RMD in December? You can still return the funds as a 60-day rollover and avoid having it treated as a taxable distribution in 2020.

RMDs are back in 2021. As of this writing, the waiver of RMDs provided by the CARES Act has not been extended.  Many retirees, especially those that did not take their RMDs in 2020 may see their RMD amount increase in 2021 due to higher investment account balances. As we move further into 2021, there may be more changes underway for how we manage our retirement savings. The anticipated reintroduction of legislation to build on the SECURE Act, or SECURE 2.0, could include many provisions written to help retirement savers meet their retirement objectives including raising the RMD age from 72 to 75.