If you are saving money into a tax deferred investment account, odds are you will have to take a required minimum distribution at some point. If you are already taking your RMDs, the deadline to do so for 2021 is December 31st.
Tax deferred investment accounts are a great way to put away money for later. Whether that’s through a workplace retirement plan, an individual retirement account (IRA), or another type of account (we’ll cover later on), saving money for the future is always a good idea
The benefits of saving, and investing, through a tax deferred account are two-fold:
- Contributions reduce your current year tax bill
- Any gains, or earnings, made on the investments are not taxed until a distribution is taken.
Unfortunately, the tax deferred growth can’t go on forever, because, well, we must pay tax on the money earned eventually.
That’s where required minimum distributions come in.
1. What is a required minimum distribution?
Your required minimum distribution is the minimum amount of money you must take as a distribution each year. Whether you need the money, or not, this distribution MUST be taken each year after a certain point in time.
You must take your first RMD by April 1st, of the year after you turn 70 ½. If your birthday is before July 1st, 1949.
If your birthday is after June 30th, 1949, you must take the RMD by April 1st of the year after you turn 72.
Your second RMD needs to be taken by the end of year in which you started. So, if you took your first RMD in April of 2021, you need to take your second RMD by December 31st, 2021. Because technically your first RMD was for 2020.
Your RMD needs to be taken by December 31st in each subsequent year.
Additionally, the CARES act waiver no longer applies to 2021, meaning RMDs must be taken by the end of the year to avoid penalty.
3. What retirement plans are affected by RMDs?
The following retirement plans are affected by the RMD requirements:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
- Profit-sharing plans
- Other defined contribution plans
As a reminder, Roth IRAs do not follow RMD rules.
4. How are RMDs Calculated?
The amount of a required minimum distribution is calculated by dividing the following two values from one another:
- The total account balance of an IRA in the previous calendar year, divided by
- A value, determined by the IRS’s “Uniform Lifetime Table.”
The final amount is the minimum amount that must be withdrawn. However, it should be noted that calculating minimum distribution requirements should be handled by financial professionals, to ensure it is done properly.
5. What happens if I don’t take my RMD? Or I take the wrong amount?
A 50% tax is applied to any amount not taken as required.
Your RMD was $5,000 and you took none of it. You owe $2,500.
If you withdrew $1,500 of the required $5,000, you would owe $1,750 (50% of $3,500).
Keep in mind that 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 personal finances.
6. What if I have multiple accounts I need to take an RMD from?
You should calculate each account’s required distribution separately. If, for example, you have two IRAs, you are allowed to combine the total RMD and take it from one account. You are allowed to combine like titled accounts. But if you have an IRA and a 401(k), for example, you must take each RMD from it’s respective account.
7. Can I take more than required?
Yes, you can of course take more than is required of you. You can take however much you want or need but will have to pay tax accordingly.
8. What if I have an Inherited IRA?
When an IRA is inherited, the inheritor becomes a beneficiary and must still take RMDs. 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.
The type of beneficiary depends on multiple factors, such as relationship to the original account owner and state of residence. Though, in general, spouses and other eligible beneficiaries may be allowed to take RMDs over their lifetime, while other beneficiaries will need to follow the 10-year rule, withdrawing the entire account within 10 years.
As with much of the tax code, RMDs can be complicated. It is best to consult with a professional because you don’t want your years of saving and investing to be ruined by missing, or miscalculating a required distribution.
If you have any questions about RMD’s please feel free to get in touch with us!