RMD Waiver is Over: When Should You Take a Distribution?

CARES Act legislation waived required minimum distributions (RMDs) just for 2020. As we wrap up 2021, some individuals will have to take an RMD by Dec. 31, 2021, or risk paying a hefty penalty. Review our answers to common RMD questions so you’re up to speed on deadlines.

Q: Do I need to take an RMD in 2021?

A:  If, prior to 2020 when RMDs were waived, you had been taking RMDs, or you turned age 72 in 2020, then yes, you have to take one by year-end to avoid a 50% penalty. For example, if you needed to take a $100,000 distribution and missed the deadline, you could conceivably owe the IRS $50,000 in penalties.

Q: What rules apply to me if I turn 72 in 2021?

A: If you have or will turn age 72 in 2021 and are taking an RMD for the first time, then your first RMD won’t be due until April 1, 2022, and your second RMD will be due by Dec. 31, 2022. You may choose to take an RMD in 2021 to help reduce your tax burden in both 2021 and 2022. After the first year of taking an RMD, all RMDs thereafter are due on Dec. 31 each year.

Q: Which types of retirement plans require minimum distributions?

A: Profit-sharing plans, 401(k) plans, 403(b) plans, 457(b) plans as well as traditional IRAs and IRA-based plans, such as SEPs, SARSEPs and SIMPLE IRAs. RMD rules also apply to Roth 401(k) accounts.

Q: Will I pay taxes on the RMD?

A: When you take a distribution from your IRA or retirement account, you will owe taxes on the amount since the IRS considers those distributions to be ordinary income. However, qualified distributions from a Roth 401(k) or a Roth IRA are tax free.

Q: Are there any exceptions to the rules?

A: If you are still working and have an employer-sponsored retirement plan, if your plan allows, you can wait until April 1 of the year after you retire to take an RMD. Keep in mind, you’ll still need to take an RMD from traditional IRAs.

Q: Is there a way to minimize my tax burden?

A: You could consider a Qualified Charitable Distribution (QCD) to a charity of your choice to help circumvent taxes on an RMD. You’re essentially taking pre-tax dollars from your IRA and sending them directly to your preferred charity, thereby circumventing tax liability on the amount distributed. Before making a QCD, consider consulting your tax professional or wealth advisor.

Sources:

“The Latest Rules for Retirement RMDs in 2021”

“Retirement Topics: RMDs”

The change in the RMD age requirement from 70½ to 72 only applies to individuals who turn 70½ on or after January 1, 2020. Please speak with your tax advisor regarding the impact of this change on future RMDs. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Mariner Wealth Advisors cannot guarantee that the information herein is accurate, complete, or timely. Mariner makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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