If you're an older retirement account owner and freaking out because the April deadline for your first required minimum distribution is almost here, take a breath.
The convergence of coronavirus pandemic tax considerations and a major retirement law's changes mean that there's no April 1 required withdrawal in 2021. No fooling.
But you'll still have to make your regular 2021 RMD by the end of the year.
RMD refresher: Let's start with a quick refresher on required minimum distributions, or RMDs. As the name indicates, these are tax code mandated withdrawals from some retirement accounts once you reach a certain age.
The RMD-affected accounts are those where your nest egg has been growing tax-deferred over the years. These include traditional IRA, Simplified Employee Pension Plan (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) individual retirement accounts, along with 401(k), 403(b), 457(b), profit sharing and other workplace provided defined contribution plans.
Uncle Sam, however, is only so patient. He wants his cut of your retirement savings and in most cases eventually gets it when you are a septuagenarian.
That's when you must pay tax, at the ordinary tax rates, on a specific RMD amount taken from your tax-deferred account(s). The exact required withdrawal is based on the account(s)' value at the end of the prior year, along with your age and corresponding life expectancy.
But exactly when in your seventh decade these delayed retirement account taxes are due has changed.
RMD age not so SECURE: RMDs used to kick in when you turned 70½. The Setting Every Community Up for Retirement Enhancement Act of 2019, or SECURE Act, pushed back the RMD effective age.
Specifically, the new retirement law says that if your 70th birthday was July 1, 2019, or later, you don't have to deal with RMDs until you turn 72.
That change, however, doesn't affect those who celebrated their 70½ birthday — and who doesn't have parties for half-year occasions? — in the first half of 2019 or earlier.
These retirement account owners got a break last year when the Coronavirus Aid, Relief and Economic Security (CARES) Act waived 2020 RMDs. However, the mandated withdrawals are back.
The next RMD for these younger 70-somethings is due by Dec. 31, 2021.
New retiree age, old RMD due dates: The end of the tax year also is key for folks now facing RMDs under the SECURE Act age change.
Retirees who turn 72 this year must take out their savings' specific taxable amount by Dec. 31.
Some, however, could get a few more months to take the RMD. That's because although the RMD age has changed, the old rule allowing for a first RMD grace period based on your birth date remains in the tax code.
If you turn 72 in the last six months of the year, you can push your initial RMD to the next April 1.
This three-month RMD postponement applies only to your first one. All RMDs after this initial one must be made by Dec. 31 of the year in which they are due.
Do the math: While it's always appealing to push off the tax implications, take a look at your personal tax and financial situation before deciding to double up in one tax year.
Two taxable distributions, by April 1 and Dec. 31, in the same tax year could bump you into a higher bracket.
So run the numbers before pushing your first RMD into the following year. It might be better to go ahead and take your initial RMD in the tax year in which it's due instead of delaying it.
About those RMD numbers: So how do you know exactly how much you take out of your tax-deferred retirement accounts?
It all starts with the funds' values at the end of the prior year. You should get a statement from your IRS or similar retirement account trustee showing its end-of-year value.
In addition to the account's value, your age and life expectancy also come into play in determining your RMD.
The IRS provides the life expectancy factor in several tables it publishes each year in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). The one used by most is t the Uniform Lifetime Table, which I recreated it in this blog post.
That life figure then is used to divide the value of your retirement plan(s) to reach the amount to withdraw.
Calculating the amount of your RMD gets a bit more involved if you have multiple retirement accounts subject to the annual withdrawal rules. You must figure each retirement plan's RMD separately. However, you don't have to take the mandated money out of each. You can withdraw the total amount from one or more of the IRAs.
Other RMD considerations: Since we're talking taxes, there are, of course, special situations where the usual required retirement withdrawals are different.
This happens when individuals with traditional tax-deferred workplace retirement plans reach the RMD age but are still on the job.
Other distribution factors also come into play for inherited IRAs and COVID-19 related distributions. In these cases, you should talk with a tax and financial adviser.
Pay on RMDs or pay more: Finally, whatever your circumstances, when RMD time rolls around don't ignore it.
Yes, RMDs can be a bit of hassle, but there's consolation in knowing that you saved for your retirement years.
And yes, no one likes having to pay tax on a nest egg.
But don't ignore it.
Not taking an RMD, or not withdrawing enough, could mean a 50 percent excise tax on the amount not distributed.
You also might find these items of interest:
- 10 RMD tax FAQ
- 7 tax breaks for older taxpayers
- IRS updates life expectancy tables that determine RMDs