The CARES and SECURES Acts offered financial relief during COVID-19. And though some of the benefits of these acts are no longer in effect, some of the rules within them were enacted as permanent changes in 2021. In this article, we will look at how these changes affect RMDs in 2021.
Keep in mind that RMDs can be incredibly costly if processed incorrectly. Therefore, the information in this article should not serve as a substitute for personal financial advice. Always contact your financial advisor before making any changes to your personal finances.
How are RMDs Calculated?
A required minimum distribution, or RMD, is a minimum amount of money one must withdraw from their IRA each calendar year after reaching a specific age.1
The amount of a required minimum distribution is calculated by dividing the following two values from one another:1
- The total account balance of an IRA in the previous calendar year, divided by
- A value, determined by the IRS’s “Uniform Lifetime Table.”
The final amount is the minimum amount that must be withdrawn. However, it should be noted that calculating minimum distribution requirements should be handled by financial professionals, as a failure to withdraw an RMD can result in a 50 percent tax penalty.1
Retirement Plans Affected by RMDs
The following retirement plans will be affected by the new RMD requirements:1
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
- Profit-sharing plans
- Other defined contribution plans
Changes to RMDs in 2021
RMDs have changed in a few ways in 2021. First, following the SECURE Act, the required age of RMDs increased from 70 and a half to 72 in 2020.2 If you will be turning 72 in 2021, and this is your first RMD, then you will have until April 1, 2022, to make your minimum withdrawal instead of the standard date of December 31 of each year. Additionally, the CARES act waiver no longer applies to 2021, meaning RMDs must be taken by the end of the year to avoid the 50 percent tax penalty.
RMDs and Inherited IRAs
When an IRA is inherited, the inheritor becomes a beneficiary and must still take RMDs.2 However, how these RMDs are processed will depend on the date of the original account owner’s passing and the type of beneficiary receiving the account.2
The type of beneficiary depends on multiple factors, such as relationship to the original account owner and state of residence.3 Though, in general, spouses and other eligible beneficiaries may be allowed to take RMDs over their lifetime, while other beneficiaries will need to follow the 10-year rule, withdrawing the entire account within 10 years.2
Of course, this is a general approach and alternatives do exist. Therefore, beneficiary type and RMDs should be determined by an advisor or other financial professionals before any actions are taken.
The way RMDs are processed may have changed this year. But by keeping this information in mind and consulting a financial professional, you can work to make sure your RMDs are withdrawn and calculated properly, without worrying about the potential tax penalties.
Ascend Investment Partners is not a legal or tax advisor. You should consult with your attorney, accountant and/or estate planner before taking any action. Ascend Investment Partners did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Ascend Investment Partners or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy Services offered through Kesler, Norman & Wride, LLC dba Ascend Investment Partners, a Registered Investment Advisor. This message and any attachments contain information which may be confidential and/or privileged and is intended for use only by the addressee(s) named on this transmission. If you are not the intended recipient, or the employee or agent responsible for delivering the message to the intended recipient, you are notified that any review, copying, distribution or use of this transmission is strictly prohibited. If you have received this transmission in error, please (i) notify the sender immediately by e-mail or by telephone and (ii) destroy all copies of this message. If you do not wish to receive marketing emails from this sender, please send an email to email@example.com Please note that trading instructions through email, fax or voicemail will not be taken.
To Get Started Click Here
Sign Up for Email to stay in touch