The Latest on Required Minimum Distribution Rules
In 2019, the SECURE Act changed the required minimum distribution (RMD) age to 72. Then the CARES Act came along and waived RMDs just for 2020. Here’s a summary of recent changes.
Q: What do I need to know about the RMD elimination in 2020?
A: The IRS has waived the requirement for taking an RMD from your IRA or employer-sponsored retirement plan, just for 2020. This waiver also applies to beneficiaries who inherited IRAs. Keep in mind, you can still take money out of retirement accounts in 2020 to live on, but you can take less than what you would have for an RMD if needed, thereby lowering your taxable income for 2020.
Q: Which plans qualify for the 2020 RMD waiver?
A: The CARES Act provisions apply to most retirement plans, including traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit sharing plans and other defined contribution plans. However, the RMD waiver does not apply to qualified defined benefit plans.
Q: What if I took my RMD in 2020 prior to the IRS waiver announcement?
A: If you turned 70 ½ in 2019 and took your RMD anytime in 2020 (before or after the announcement), you could have opted to “return it” by rolling it over to another IRA, another qualified retirement plan or return it to the original plan. If you returned it, you had to do so by Aug. 21, 2020 and if you did that, then you don’t have to report that amount on your 2020 federal tax return. Also, if you returned the amount back to the distributing IRA, it doesn’t count against the rule that says you can only have one rollover every 12 months.
Q: If I turned 70 ½ in 2019, when do I take my next RMD?
A: If you turned age 70½ by the end of 2019, to meet the requirements, you should resume taking RMDs in 2021. You won’t have to take a “double” RMD in 2021, just the regularly calculated amount. However, If you had not turned age 70½ by the end of 2019, you are not required to take your first RMD until April 1 of the year after you turn age 72.
Q: What if I was a beneficiary of an RMD distribution?
A: According to the IRS, if you are an IRA owner or beneficiary who received an RMD in 2020, you also could have chosen to repay the distribution to the distributing IRA by Aug. 31, 2020, to avoid paying taxes on that distribution.
Q: If I turned age 72 in 2020, when do I have to take my first RMD?
A: If you turned age 72 in 2020, you have to take your first RMD by April 1, 2021.
Q: What happens if I miss the 2021 RMD deadline?
A: If you turned 72 in 2020 and don’t take your first RMD by April 1, 2021, then you might have to pay a 50% excise tax on the amount that wasn’t distributed. This also triggers a need to file a Form 5329, so consult with your advisor and tax professional for more information.
Q: What if I inherit an IRA this year?
A: The new SECURE Act law states that the entire balance of the IRA must be distributed to the beneficiary within 10 years. Prior rules gave beneficiaries their lifetime to take distributions. There are exceptions to the 10-year rule for a surviving spouse, a child who hasn’t reached the age of majority, a disabled or chronically ill person or a person who is not more than 10 years younger than the IRA account owner. Talk to your advisor for further guidance.
Q: Do I have to take an RMD if I am still working?
A: If you work past age 72 and are still participating in your employer’s retirement plan, you can delay taking an RMD until April 1 following the calendar year in which you retire (if the retirement plan allows this and you own 5% or less of the company). After that, you must take distributions no later than Dec. 31 of each calendar year. However, if you have an IRA or another retirement plan outside of work, you will need to begin taking RMDs from that account under the standard RMD rules.
Q: What is the potential tax impact of delaying RMDs until age 72?
A: Because the RMD for some individuals starts two years later than previous rules required, it’s possible the RMD could be higher than if that individual started taking them at age 70 ½. In this scenario, it might mean more taxable income. It could also mean this individual is pushed into a higher marginal tax rate and it might trigger increased Medicare premiums. Consult with your advisor and tax professional for guidance on your situation.
Partner With Your Advisor
Consider consulting with your advisor before you approach your RMD age. At Mariner Wealth Advisors, we believe an effective tax strategy should be part of an overall wealth management plan. Your advisor can help with whether it makes sense to shift some of your retirement savings into a Roth IRA to minimize the tax impact of RMDs from your other retirement accounts.
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