Time is Running Out to Take Your 2021 RMD

Required Minimum Distributions (RMD) are required taxable distributions from qualified retirement plans and are commonly associated with traditional IRAs, but they also apply to 401(k)s and SEP IRAs. The tax code does not allow taxpayers to indefinitely keep funds in their qualified retirement plans. Eventually, these assets must be distributed, and taxes must be paid on those distributions. If a retirement plan owner takes no distributions, or if the distributions are not large enough, then he or she may have to pay a 50% penalty on the required distribution amount that is not distributed.

The penalty for failing to take the required minimum amount is 50% of the amount that should have been withdrawn but wasn’t. The penalty can be waived where the failure to take the required distribution was due to reasonable cause and steps are being taken to remedy the shortfall. The penalty waiver must be applied for, creating additional hassle, not to mention the potential additional tax created by multiple-year distributions in one year.

Note: RMDs do not apply to Roth IRAs.

RMDs historically have needed to begin in the year when the retirement plan owner became age 70½, but a recent tax law change upped the starting age to 72 for years after 2019. The first year’s distribution for those turning age 72 in 2021 can be delayed to no later than April 1 of 2022. However, delaying the first distribution means taking two distributions in the subsequent year which has tax consequences.

RMDs for 2021 are determined based upon the values of the accounts as of December 31, 2020, divided by the distribution period. The distribution period is based the taxpayer’s life expectancy determined from the Uniform Lifetime Table for the taxpayer’s current age.