Taking required minimum distributions in 2021

minimum distributions

Most people who have traditional IRA or tax-deferred retirement accounts know that they have to take required minimum distributions (RMDs) after reaching a certain age to avoid penalty.  With the passage of the CARES Act last March, people were allowed to skip taking these withdrawals in 2020. Now that it is 2021, however, RMDs must be taken again.

RMD overview

As soon as you reach age 72 (or age 70½ before 2020), you have to begin taking RMDs from certain retirement accounts including 401(k) plans and traditional IRAs. RMDs are calculated using IRS life expectancy tables. People who don’t withdraw the minimum amount each year may have to pay a 50% penalty tax on what they were supposed to have taken out. This is different from Roth IRAs, which don’t require withdrawals until after the death of the owner.

There is nothing forbidding you from taking out more than the required amount. When planning for distributions, make sure that your income needs are weighed against the goal of maintaining the tax shelter of the IRA for as long as possible for both yourself and your beneficiaries.

To provide tax relief due to COVID-19, the CARES Act suspended RMDs for 2020 — but not beyond. This allowed taxpayers to put off RMDs so that they didn’t have to pay tax on them and their retirement accounts could keep growing tax deferred.

Taking RMDs this year

Although many people hoped that the RMD suspension would be extended into 2021, the Consolidated Appropriations Act didn’t extend the RMD relief. That means that people who are required to take RMDs, need to take them again this year or face a penalty.

Under certain circumstances, the IRS may waive part or all of the penalty. This can happen if you can prove that you didn’t take RMDs due to reasonable error. In these cases, the IRS may decide to grant a request for a waiver.

Keep more of your money

Contact us if you have questions about calculating RMDs or avoiding the penalty for not taking them. We can help make sure you keep more of your money.