The IRS is reminding taxpayers about the rules for required minimum distributions (RMDs) from retirement accounts. Previous rules stated that a retirement plan account owner must begin taking an RMD annually starting the year they reach 70½ or 72, depending on the birthdate and retirement year of the plan owner. Retirement plans requiring RMDs include Simplified Employee Pension (SEP) plans and Savings Incentive Match Plan for Employees (SIMPLE) Individual Retirement Accounts, 401(k), 403(b), 457(b), profit sharing, and other defined contribution plans.
A SEP plan provides business owners with a simplified method to contribute toward their employees’ retirement as well as their own retirement savings. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each plan participant (a SEP-IRA). A SEP-IRA account is a traditional IRA and follows the same investment, distribution, and rollover rules as traditional IRAs.
A SIMPLE IRA plan allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.
However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the age when individuals must begin taking withdrawals from their retirement accounts. Someone born on or before June 30, 1949, was required to start getting RMDs for the year they reached the age of 70½. However, under the SECURE Act, if a person’s 70th birthday is July 1, 2019, or later, they do not have to take their first RMD until the year they reach age 72.
Further, the Coronavirus, Aid, Relief and Economic Security (CARES) Act waived RMDs during 2020 so seniors and retirees, including beneficiaries with inherited accounts, were not required to take money out of IRAs and workplace retirement plans. The waiver included RMDs for individuals who turned age 70½ in 2019 and took their first RMD in 2020.
Individuals who reached age 70½ before 2020 and were still employed, but terminated employment in 2020, would normally have a 2020 RMD due by April 1, 2021, from their workplace retirement plan. This RMD is also waived as part of the CARES Act relief. Roth IRAs do not require withdrawals until after the death of the owner.
2021 RMDs
Individuals who reached 70½ in 2019 or earlier did not have an RMD due for 2020. For 2021, they will have an RMD due by December 31, 2021. Individuals who did not reach age 70½ in 2019, who will reach age 72 in 2021, will have their first RMD due by April 1, 2022, and their second RMD due by December 31, 2022. To avoid having both amounts included in their income for the same year, the taxpayer can make the first withdrawal by December 31, 2021, instead of waiting until April 1, 2022. After the first year, all RMDs must be made by December 31.
An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Calculating the amount of the RMD depends on the type of IRA or if they are from multiple accounts. Not taking a required distribution, or not withdrawing enough, could mean a 50% excise tax on the amount not distributed.
Delaying RMDs
Though the April 1 deadline for taking the first RMD is mandatory for all owners of traditional IRAs, participants in workplace retirement plans who are still working usually can, if their plan allows, wait until April 1 of the year after they retire to start receiving distributions from these plans. Individuals who reached age 70½ before 2020 and were still employed, but terminated employment in 2020, would normally have a 2020 RMD due by April 1, 2021 from their workplace retirement plan. This RMD is also waived as part of the CARES Act relief.
In addition to these changes, public schools and some nonprofits have special rules. Contact us about your specific circumstances.