The CARES and SECURES Acts offered financial relief during COVID-19. Some of the rules enacted became permanent changes in 2021. In this article, we will look at how these changes affect RMDs in 2021.
RMDs can be incredibly costly if processed incorrectly. Therefore, the information in this article should not serve as a substitute for personal financial advice. Always contact your financial advisor before making any changes to your finances.
How are RMDs Calculated?
A required minimum distribution, or RMD, is a minimum amount of money one must withdraw from their IRA each calendar year after reaching a specific age.1
To calculate the amount of a required minimum distribution, dividing the following two values from one another:1
- The total account balance of your pre-tax retirement account at the end of the last day of the previous calendar year, divided by
- A value, determined by the IRS's "Uniform Lifetime Table."
The above calculation is the minimum amount that you must withdraw. However, calculating minimum distribution requirements should be handled by financial professionals. A failure to take an RMD can result in a 50 percent tax penalty.1
Retirement Plans Affected by RMDs
The following retirement plans will be affected by the new RMD requirements:1
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
- Profit-sharing plans
- Other defined contribution plans
Changes to RMDs in 2021
RMDs have changed in a few ways in 2021. First, following the SECURE Act, the required age to start RMDs increased from 70 1/2 to 72 in 2020.2 RMDs must be taken by the end of the year to avoid the 50 percent tax penalty. If this is your first year to take an RMD, you will have a "grace period" until April 1, 2022, to get it done.
RMDs and Inherited IRAs
When an IRA is inherited, the inheritor becomes a beneficiary and must still take RMDs.2 However, how these RMDs are processed will depend on the date of the original account owner's passing and the type of beneficiary receiving the account.2
The type of beneficiary depends on multiple factors, such as relationship to the original account owner and state of residence.3 A spouse may be allowed to take RMDs over their lifetime; other beneficiaries will need to withdraw the entire account within 10 years.2 Of course, this is a general approach, and alternatives do exist. Therefore, talk with your advisor or other financial professionals before taking action.
The way RMDs are processed may have changed this year. But by keeping this information in mind and consulting a financial professional, you can make sure your RMDs are withdrawn and calculated correctly without worrying about the potential tax penalties.
This content is developed from sources believed to be providing accurate information and provided by Twenty Over Ten. It may not be used to avoid any federal tax penalties. Please consult legal or tax professionals for specific information regarding your situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.