Required Minimum Distributions Are Back in 2021!

Benjamin Haas |

The IRS stipulates that age seventy-two is long enough for avoiding income tax on retirement savings (specifically, pre-tax retirement savings).  Each year, those that have reached this age milestone will be required to withdrawal a minimum amount and pay taxes on that income, whether they like it or not.  This is called a required minimum distribution, or RMD.

Last year at the onset of the pandemic, Congress passed the CARES Act, which in part suspended the requirement to take distributions in 2020. The thought process was to give seniors some latitude to not have to liquidate investments while the market was in a free-fall. They certainly didn’t imagine at that time that the market would recover as quickly as it did!

Hence, RMDs are back in 2021. If you have yet to take your required distribution, that’s ok, you have until December 31st to do so. But be sure to check all accounts and meet the requirements because there is a penalty for missed RMDs and it is nasty; a 50% excise tax.  

Here are a couple other things we typically talk about when it comes to RMDs:

  • The age 72 requirement is relatively new, updated from age 70.5 in the SECURE Act, December 2019. If you’re not sure whether you are required to take a distribution or not, give us a call and we will walk you through it. 
  • RMDs by definition are a minimum requirement calculated using an age-based table. Hence, your distribution is completely unique to you based on your age and the value of the account on 12.31.2020. 
  • If you have multiple IRAs, you do not need to take from each account. The requirement is a minimum withdrawal based on the value of all your qualified accounts, but you have the choice to determine which account(s) that minimum amount is withdrawn from. 
  • What if you don’t want/need the distribution?
  • You can pay the taxes and then make an outright gift up to $15,000/year to any individual without having to file a gift tax return with the IRS.
  • You could pay the taxes and open up a college savings plan for your grandchildren.  Some college savings plans such as 529 plans grow tax-deferred and can be withdrawn tax-free for qualified education expenses in the future.
  • You could make a direct gift to charity. Outright gifts help reduce your tax liability dollar for dollar. There are specific rules to gifting directly from your IRA though, so reach out to us if this sounds like something you would want to consider. 

If it all sounds like a lot to consider, that’s OK.  Give us a call and we’ll help you through the process of prioritizing your objectives and putting a plan together.

This information is not intended to be a substitute for specific individualized tax advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.
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