Have You Taken Your 2021 RMD Yet: New Rules in Effect
Category: Financial and taxes in retirement
March 16, 2021 — If you turned 72 in 2020 or before, you probably will have to take a Required Minimum Distribution (RMD) this year from your IRA and/or 401(k) type plans. That is unlike last year, when COVID relief in the SECURE Act gave everyone a pass on taking the RMD.
All of those years when you were deducting your 401(k) and IRA contributions from your pre-tax income, and enjoyed tax free accumulation of earnings and interest on those investments, come home to roost when you reach a certain age. The law requires that you take an RMD from those retirement funds by a percentage that grows every year. Every cent of those withdrawals is considered taxable as ordinary income. Inherited IRAs and 401(k)s have different rules. Roth IRAs generally do not require RMDs.
The age at which you must start taking your first RMD has changed. If you turned 70 ½ in 2019 or earlier, you need to have taken your first RMD by April 1 of the year after that, and keep making them for the rest of your life. If your 70th birthday is July 1, 2019 or later, you do not have to take withdrawals until you reach age 72 (first one by April 1 of the following year and Dec. 31 thereafter). The idea for pushing out the requirement by 1½ years is to help retirees accumulate more savings before they have to start withdrawing them. Note if you delay the first one until April 1 the next one has to be paid by December 31. There is currently a bipartisan bill in congress that would extend the age when you have to take your first distribution to 75.
Comments on "Have You Taken Your 2021 RMD Yet: New Rules in Effect"
LS says:
RMDs must be calculated separately for 401k and traditional IRAs. You cannot combine them for the purpose of taking the distribution from one account. Also inherited IRAs must be treated separately. The same for 403b accounts.
Billy says:
Don't you have to take 2 RMD's the first year if you delay taking the first till the following year?
Admin says:
Good points Billy and LS. We have edited the article to make these points clearer.
Billy, you are right. That first year you have until April 1 for the previous year withdrawal but you still have to take the current year RMD by Dec. 31. So you can decide if you want to take one in the first year you are required to avoid two withdrawals in one year.
LS, you are correct that you have to treat your 401k, etc. and IRAs separately. For that reason it is more convenient to keep all of them with one company and not have to go to several places to get the withdrawal amounts.
Louise says:
Admin, you skipped entirely inherited IRA's. I inherited my Mother's IRA when she passed away in 2013 and have to pay RMD on that account. I am not 72 and by the time I am, I will have paid 12 years on RMD's before age 72. I was told it was mandatory to pay RMD's on inherited IRA's from time of inheritance. My Mother was 79 at time of passing.
Editor Comment: You are so right Louise, good point about inherited IRA's. They are a very different animal. And also complicated, depending if you are a spouse or other heir. This link at IRS has the basics. https://www.irs.gov/retirement-plans/required-minimum-distributions-for-ira-beneficiaries
Admin says:
Richard Neal, D-Mass., and ranking member Kevin Brady, R-Texas, have introduced the Securing a Strong Retirement Act of 2020, which would change the required minimum distribution age from 72 to 75. It is uncertain if it will be passed, but since it is bipartisan it has a chance.
HEF says:
Louise brought up an Inherited IRA which may affect some but the rules have changed there for more recent non-spousal beneficiaries. I inherited part of an IRA last summer, when my father passed away. We have 10 years (until 31 Dec. of the 10th year or 31 Dec 2030 for us) to empty that account - all of it taxable income. Whatever is left in that Dec. they will write a check and close the account. Trouble with it now is that even though I have taken distributions, the total is still going up! Good news and bad news :-)
Louise says:
I think this article explains it better than the link Admin provided: https://www.forbes.com/sites/bobcarlson/2021/01/22/mistakes-ira-beneficiaries-are-making-after-the-secure-act/?sh=1a1b6ee869f0
I was not aware of the Secure act till I read the article and how inherited IRA's had to be withdrawn in 10 years time.
I inherited my Mom's IRA in 2013, therefore, I am grandfathered and continue the Stretch IRA for the rest of my life. I only take out the minimum required distribution each year and the original amount seems to keep building back up each year.
Admin says:
Another consideration to keep in mind with RMDs, particularly if you have to take large ones, is state taxation. There are 9 states that have no income tax at all (AK,FL, NH, NV, SD, TN, TX, WA, WY,) and 3 other states do not tax distributions from 401(k)s and IRAs. Those are IL, MS, PA.