The RMD Vacation is Over
April 1, 2021
Last year seniors were given a reprieve from the requirement to take minimum distributions from their IRAs and qualified retirement plans. The suspension of the rules, included in the CARES Act, was enacted at a time when the stock market had moved sharply lower, and so it was intended to prevent a forced emptying of retirement funds when values were low. Prices have since risen and the market indices have been setting records. There is no sign of Congress renewing a suspension of the rules.
Accordingly, taxpayers who turn 72 this year must begin taking their RMDs (required minimum distributions), and older taxpayers must resume their program of drawing down tax-favored retirement funds. The amount of the RMD is calculated based upon the age of the account owner and the total retirement account values at the close of the prior taxable year.
Normally the RMD must be received during each tax year, with failure to distribute the full amount subject to a 50% tax penalty. However, there is a grace period for the first year of RMDs, as the senior gets used to the new distribution program. For those who turn 72 in 2021, the first RMD is not due until April 1, 2022. That gives them an extra year of tax-deferred growth.
Caveat: The grace period is not a panacea. Someone who delays a first RMD to 2022 will have to take two such distributions for the 2022 tax year, which could lead to higher taxes on the distributions as well as higher taxes on Social Security benefits and perhaps higher Medicare premiums.
An RMD may be taken at any time during the tax year. In a rising market, maximum tax deferral may be obtained by delaying the distribution for as along as practical. Someone who will be using the distributed funds for ordinary expenses may want to withdraw 1/12 of the RMD on the first of each month. This “averaging out” approach may be preferred when stock prices are especially volatile.
If you have several IRAs, the RMD is determined by adding all the accounts together. However, you do not need to take an RMD from each account. You could take the entire distribution from the smallest account for consolidation, or you could choose to liquidate the investments with the poorest prospects to rebalance your portfolio as you take the distribution.
RMDs can be tricky, so getting professional advice is likely to be money well spent.
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