Skip to main content

RMDs, or Required Minimum Distributions, are withdrawals that are mandated by the IRS each year out of your traditional retirement accounts like 401(k)s and IRAs starting at age 72. The money that you have to take out annually by December 31st at midnight is taxed based on your income tax rate for that tax year.

 

It’s easy to forget about RMDs. Many people don’t realize how big the income tax bite may be when they have to start taking money out of taxable accounts like 401(k)s each year, starting at age 72. Because of the pandemic, the CARES Act suspended the RMD for the 2020 tax year in an effort to help retirees avoid withdrawing money from accounts when the market was down.

(An RMD is calculated based on the closing balance of the account at the end of the previous year. When the markets drop significantly, the RMD represents a much higher percentage of a diminished portfolio and that reduces the ability to recover from big losses.)

In 2021, the RMD will be back. As an example, a 75-year-old man with a traditional IRA worth $100,000 will have to withdraw $4,367 this year.

Roth 401(k) Plans

Roth 401(k) plans, which are funded with after-tax dollars, are subject to the same RMD rules that traditional 401(k) and IRA plans are. The amounts are calculated using the same IRS life expectancy tables and account holders must begin taking them after they turn 72. (One exception is if you continue working after age 72 for the company that sponsors the plan and you don’t own more than 50% of the company.)

The difference is that Roth 401(k) withdrawals are usually not taxed.

You can avoid taking the minimum distributions entirely by rolling a Roth 401(k) into a personal Roth IRA, which is not subject to RMD rules.

2020 RMDs Without Penalty, But With Taxes

As part of the CARES Act, the IRS allowed COVID-related withdrawals from traditional retirement plans up to $100,000 without penalty in 2020 for those who were impacted by the pandemic. Income taxes were due on those withdrawals, which could be paid over a three-year period. Those who can afford to can pay the withdrawals back this year (or over a three-year period) can get the taxes back by filing amended tax returns.

Those Who Just Turned 72—It’s Complicated

The SECURE Act of 2019 raised the age when RMDs must begin to age 72. If you turned 70-1/2 in 2019, the old rules applied—your first RMD should have been due April 1st, 2020. However, because the CARES Act suspended RMDs, the new due date was April 1, 2021 for those individuals.

For retirees who turned 72 in 2020 or will turn 72 this year, you can take your RMD at any point in 2021, or even delay it up until April 1, 2022. But if you choose to delay it, you will owe two RMDs in 2022, which could put you into a higher tax bracket.

You should check with your tax professional before making decisions about RMDs, because there are strict rules about which accounts must be withdrawn from and stiff penalties for mistakes—to the tune of taxes owed plus an additional 50%!

 

To discuss your retirement plan, including RMDs, please call us. We are happy to discuss ideas with you and/or your tax professional.

 

This article is provided for educational purposes only and its content should not be relied upon for tax advice. As always, check with your tax professional or attorney for specific tax advice related to your situation.

Source:

https://www.cnbc.com/2021/03/01/required-minimum-distributions-on-retirement-plans-are-back.html

 

 

We are an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. Securities offered by Registered Representatives through Private client Services, Member FINRA/SIPC. Advisory products and services offered by Investment Advisory Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a Registered Investment Advisor. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Qualified Plan Advisors, (“QPA”). Private Client Services, Prime Capital Investment Advisors, LLC, and Giesting Financial are unaffiliated entities. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. None of the information contained on this website shall constitute an offer to sell or solicit any offer to buy a security or any insurance product. Any references to protection benefits or steady and reliable income streams on this website refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products. Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by insurance company. Annuities are not FDIC insured. The information and opinions contained in any of the material requested from this website are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. They are given for informational purposes only and are not a solicitation to buy or sell any of the products mentioned. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation.