RMDs, which are required minimum distributions, mandated by the IRS to be taken from traditional IRAs, rollover IRAs, SIMPLE IRAs, SEP IRAs, most Keoghs, and most 401(k) and 403(b) plans, were waived in 2020. But as life returns to the “new normal,” RMDs are back. While the March 2020 passage of the CARES Act (Coronavirus Aid Relief and Economic Security) temporarily waived the required minimum distributions for all types of retirement accounts, included inherited IRA plans, the waiver expired in December of 2020.
In most cases, if you were taking distributions from your account before 2020, you must resume doing so. The amount you are required to withdraw, which is based on a formula established by the IRS that includes the balance in your qualifying account divided by a life expectancy factor, may be surprisingly more today than it was when you paused making withdrawals in 2020. The reason for this increase is that if the strong stock market helped your account grow robustly over the past year, then your required percentage of withdrawal has increased along with your account balance. Fortunately, there is no requirement to make up the missed 2020 distribution with the resumed 2021 distributions.
If you reached the age of 70.5 years in 2019, you were required to commence making withdrawals from your retirement account. Specifically, anyone born on July 1, 1949, or after, can wait to commence withdrawals until they are age 72. At that point, your first RMD is due by April 1 of the year AFTER you turn 72. Your second withdrawal, however, is then due by December 31 of the same year, with a withdrawal due by December 31 each year thereafter. The change from the required age of 70.5 to age 72 is a provision of the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
Avoiding or Reducing RMDS
Roth IRAs have no required withdrawals until after the account owner’s death, therefore, RMDs apply only on inherited Roth IRAs. There are also a few very specific exclusions from RMDs, that apply if you reach age 72 and are still employed and are a participant in a qualified employer-based retirement plan such as a 401(k) plan. In this situation, you may have the provision to delay making required minimum withdrawals until you do retire. This caveat applies only to workers who do not have ownership in the company, or who own less than 5% of the company, and it is applicable only to the employer-based account, and not to any other accounts such as IRAs.
Lastly, while retirement savings in a nonqualified deferred compensation plan have requirements on the timing and form of payout, as established by the nonqual plan rules, there is no mandate from the IRS that requires withdrawals from the account.
Learn more about what the CARES Act changed regarding RMDs.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.
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