There is still time in 2021 to take out your Required Minimum Distribution (RMD) from your retirement plan if you have not already done so – but you’re cutting it close!
RMDs - a quick review
If you are retired and age 72, you are familiar with the mandatory RMD. Since it has a potentially harsh penalty if missed, it is worth reviewing with just a couple of weeks left before the December 31st deadline.
When you reach a certain age, which is now age 72 (from 70 ½), the IRS requires that you withdraw a minimum amount of money out of your Traditional IRA and retirement plans each year. However, the IRS suspended the rule for RMDs in 2020 because of Covid-19.But it was brought back fully for 2021 – don’t miss it.
The gist behind RMDs is you do not get to keep money in your Individual Retirement Accounts (IRAs) forever, and they generate tax revenue. This rule applies to Traditional IRAs, 401(k)s, Roth 401(k)s, 403(b)s, SEP-IRAs and SIMPLE Plans. It doesn’t apply to Roth IRAs.
You can withdraw the total of your RMDs from one IRA (aggregate the RMDs for your IRAs) or take them separately from each IRA. However, you must take the RMDs separately from qualified plans (like a 401k), as they cannot be aggregated like IRAs.
The year you reach age 72
RMDs must be withdrawn by April 1 of the year following the year you reach age 72. Note: an exception is if you work past age 72, you may not have to take an RMD from your workplace plan as long as you are not a 5% or more owner of the business. But you still need to take an RMD from your other plans.
For years after the initial RMD is made, future RMDs must be withdrawn by December 31 of each year. This includes the calendar year after you turn age 72, even if you took your first RMD during that same year (meaning you will take two RMDs in one year causing more taxes).
Potential Penalty and taxes
If an RMD is not withdrawn by the deadline - or you take less than the full required amount - the amount not withdrawn is subject to a 50% excise tax! Your plan provider (or custodian) may allow you to set automatic withdrawals of you RMD to help avoid this penalty.
Most people choose to have taxes withheld from their RMDs, because it is ordinary income.
5 Star Tip: If you decide not to withhold taxes from your RMD, make sure you have funds set aside to pay the tax as under withholding can cause a tax penalty.
What if I don’t need my RMD?
Many people withdraw their RMD, and put it into an after tax investment account. An after tax account generally has no restrictions or penalties - it's there when you need it.
If you are charitably minded and because you are over age 72, you can consider what is called a Qualified Charitable Distribution (QCD). A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity. This also counts towards your RMD (up to $100,000 per year). A QCD can lower your taxable income (and help in other areas) and be used even if you take the standard deduction. A QCD is great if you need to take an RMD and want to make a gift to charity.
RMDs are for people age 72 and over, and there are ways to manage them tax efficiently. Also, since there were no RMDs in 2020, some may have lost sight of this year’s RMD or assumed it was suspended again for 2021. That is not the case, but you still have a little time.
John Piershale, CFP®, AEP®
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