Included in all the recent tweaks to the tax code from the Secure Act, the CARES Act and new Biden administration initiatives, there have been several changes to the required minimum distributions retirees must take from their IRAs and other retirement plans. Add them together, and they could have a significant impact on the way clients handle their finances in retirement. Use this guide to help your clients better understand RMDs.
1. What types of retirement plans require RMDs?
The RMD rules apply to all employer-sponsored retirement plans, including 401(k)s, 403(b)s, 457(b)s, and profit-sharing plans, as well as traditional IRAs plus IRA-based plans such as SEPs, SARSEPs and SIMPLE IRAs. The RMD rules also apply to Roth 401(k) accounts, but only after the owner has died.
2. When do clients have to start taking RMDs?
Due to changes made by the Secure Act, which passed in 2019, if a client's 70th birthday is July 1, 2019, or later, you they not have to take withdrawals until they reach age 72. This is up from the previous deadline of age 70½. This seemingly small change could have a big impact on retirement accounts: You get an additional 18 months in which, rather than beginning to deplete your savings, you have the opportunity to let them grow further.
3. How do I calculate a required minimum distribution?
The IRS calculates RMDs by taking the sum total of all your tax-deferred retirement accounts at the end of each year and dividing it by a number based on your life expectancy and a few other factors. As your age increases, the required distributions get larger. The IRS worksheet for calculating RMDs can be found here.
4. Are RMDs still waived this year, like they were in 2020?
Last year, the CARES Act allowed everyone to waive their RMDs in response to the COVID-19 crisis, but there is no RMD waiver for 2021. As a result, clients turning 72 or older as of December 31, 2021, must take an RMD by year end.
5. When is the annual RMD deadline?
For most people, the annual deadline for taking an RMD is Dec. 31. But if it's your first RMD, you can wait until April 1 of the next year. So if this is your first year to take an RMD, you don't have to take it until April 1, 2022. If you wait that long, though, remember that you'd have to take two RMDs in that calendar year — the first by April 1 and the second by December 31.
