The CARES and SECURE Acts offered financial relief to American families during COVID-19. And though some of the benefits of these acts are no longer in effect, some of the rules became permanent in 2021. This article will look at how these changes affect Required Minimum Distributions (RMDs) in 2021.
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 from your financial advisor.
How are RMDs Calculated?
A required minimum distribution, or RMD, is a minimum amount of money one must withdraw from their IRA each calendar year after reaching a specific age.
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 life expectancy value provided in the IRS 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The final amount is the minimum amount that must be withdrawn.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, as a failure to withdraw an RMD can result in a 50% tax penalty.
Retirement Plans Affected by RMDs
- 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.
Changes to RMDs in 2021
RMDs have changed in a few ways in 2021. First, with the SECURE Act, the required age of RMDs increased from 70 ½ to 72 in 2020. More specifically, if you will be turning 72 in 2021 and this is your first RMD, you will have until April 1, 2022, to make your minimum withdrawal ― instead of the standard date of December 31 of each year. Additionally, the CARES act waiver no longer applies in 2021, meaning RMDs must be taken by the end of the year to avoid the 50% tax penalty.
RMDs and Inherited IRAs
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. 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 ten years.
Of course, this is a general approach, and alternatives do exist. Therefore, beneficiary type and RMDs should be determined by an advisor or other financial professional before taking any action.
By keeping this information in mind and consulting a financial professional, you can make sure your RMDs are withdrawn and calculated properly without worrying about the potential tax penalties.
Erickson Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management. He is a Certified Financial Planner®️ professional and a Chartered Retirement Planning Counselor®️. Eric brings over 20 years of experience working with high net-worth individuals and families, helping them achieve their goals of protecting and growing their wealth for retirement and for generations to come. Because Eric is a CFP®️ professional, he adheres to high ethical standards and engages in at least 30 hours of approved continuing education in the financial industry each year.
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