Last year, the passage of the CARES Act waived required minimum distributions (RMDs) for everyone. However, that waiver has ended, and now, if you’re of RMD age, you must ensure that you take your RMD this year–and in subsequent years.
What is the RMD Age?
In 2019, the SECURE Act increased the RMD age from 70 ½ to 72. If you are turning 72 in 2021, you must take your 2021 by April 1, 2022. If you’re 72 or older, you must take your RMD by December 31, 2021.
What Happens if I Don’t Take an RMD in 2021?
If you forget to take an RMD in 2021, you will pay an excise tax of 50% of the difference between what you took and the amount of your RMD. For example, if your 2021 RMD is $15,000, and you only took $10,000 in 2021, you will pay a $2,500 penalty for not taking the full RMD amount. And that excise tax comes on top of the regular income taxes you’ll owe on the RMD itself.
I Inherited a Retirement Account. Now What?
Beneficiary IRAs can get a little tricky. There are a few different scenarios, and if you’re a spousal beneficiary who has inherited your deceased spouse’s IRA, there may be some exceptions to these rules.
If You Inherited an IRA Before 2020:
- You must take an RMD this year if it falls under the five-year rule and you inherited the IRA in 2015. Normally, the five-year rule would have meant that you had to take the RMD in 2020, but since RMDs were waived for everyone last year, 2021 has become your fifth year of ownership of the inherited IRA–and the entire balance of the inherited IRA must be distributed this year.
- If you take RMDs under the life-expectancy rule, you must take an RMD every year (except 2020, due to the RMD waiver) following the year in which the IRA’s original owner passed away.
If you inherited the IRA in 2020 and are following the life expectancy rule, you must take an RMD in 2021 if you are an eligible designated beneficiary (which includes being the surviving spouse of the account owner; disabled or chronically ill; a minor; or not more than 10 years younger than the original IRA owner) and taking the distributions over your life expectancy.
What About RMDs in 2022?
People are living longer these days. So, the IRS is releasing new life expectancy tables starting on January 1, 2022 (fun fact: the original release date was January 1, 2021, but then COVID-19 happened, so the date was pushed back by one year). With this change, RMD amounts will be smaller, which will allow account owners to keep more of their retirement savings longer.
Keep in mind that the above are all very general guidelines about the RMD rules. It’s best to speak to a professional when determining whether you must take an RMD (and if so, how much to take). If you’d like some help in making these decisions, or just want to have a better understanding of how RMDs work, click here to schedule an appointment with one of our advisors.