Now that it’s 2021, required minimum distributions (RMDs) are back.
RMDs were suspended for the year 2020 by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, but no longer.
If you were taking RMDs before 2020, you’ll have to resume your RMDs now. As a reminder, RMDs apply to traditional IRAs (individual retirement accounts) and other tax-deferred accounts. Roth IRAs are not subject to RMD requirements during the Roth IRA owner’s lifetime. As another reminder, I caution you to speak with your accountant or tax adviser before taking RMDs.
Let’s go through a few simple examples, assuming you have a single IRA that was worth $1 million on 12/31/2020. That’s the measuring date for 2021 RMDs.
The official guide to RMDs is IRS Pub. 590-B, “Distributions from Individual Retirement Arrangements (IRAs)” (tinyurl.com/yyvsbdtj). While the new 2020 version of Pub. 590-B is not out yet, the divisors have not changed from 2019.
Assume you are 84 years old. You’ll find your RMD divisor (“Distribution Period”) of 15.5 in “Table III (Uniform Lifetime)” of Pub. 590-B (Appendix B). Based on that divisor, your 2021 RMD will be $64,516.13, or 6.45% of $1 million. That’s the amount that must be withdrawn before 12/31/2021.
Another divisor applies if your spouse is your sole beneficiary and he or she is more than 10 years younger. See Table II of Appendix B.
As pointed out by W.F., a reader of this column, those born in 1949 need some special help understanding RMD rules as a result of the SECURE (Setting Every Community Up for Retirement Enhancement) Act. Those who were born in the first half of the year (Jan. 1 through June 30, 1949) turned 70 1/2 in 2019, before the adoption of the SECURE Act. They became subject to RMD rules in 2019.
Those born in the second half of 1949 (July 1 through Dec. 31, 1949) are governed by the SECURE Act’s age 72 rule. For instance, W.F.’s birthday is in September of 1949. He is turning 72 this year, so he will need to take a 2021 RMD. The Table III divisor for age 72 is 25.6, 3.9% of the 12/31/2020 balance.
Keep in mind that if you are taking your very first RMD in 2021 because you are 72 (having been born in the last half of 1949), a special rule applies to you. In that case (your very first RMD), you can choose to take two RMDs in 2022 instead of one in 2021 and another in 2022. That is, you can take your first RMD based on 12/31/2020 values by 12/31/2021 or, if you choose, you can delay that very first RMD to the first quarter of 2022 (by 4/1/2022). But that means you will be taking two RMDs in 2022: your 2021 RMD based on your 12/31/2020 values and your 2022 RMD based on your 12/31/2021 values. Be sure to talk with your accountant before deciding on a course of action for your first RMD.
If you were born anytime in 1950, you can take a breather. RMDs don’t apply to you — yet. You will turn 72 in 2022.
Before signing off, let me share a resource with you — a list of 2021 limits for traditional IRAs, Roth IRA and employer retirement accounts (tinyurl.com/y6tb7aw5). The resource, made available by Brentmark, also reproduces the Uniform Lifetime Table that we discussed in this column. Brentmark is a provider of calculation software for financial, estate, retirement and charitable planning.
Check out IRS resources as well, including those relating to RMDs (tinyurl.com/zn7ckor and tinyurl.com/gr7dhap) and IRAs (tinyurl.com/ycju3hmw).