Key Points
- Required minimum distributions (RMDs) were suspended in 2020 but are back for 2021.
- An RMD is the minimum amount you must withdraw annually from your retirement account when you are age 72 and older.
- For those who have been taking a RMD before 2020 you must continue do so now.
- Here’s a reminder of how to avoid a big tax penalty.
Across 401(k), IRA, 403(b) and 457(b) accounts, the IRS does not allow investors to maintain the balances indefinitely. A minimum amount must be withdrawn each year beginning at age 72. This is a required minimum distribution, or RMD.
The CARES Act granted a one-time waiver for RMDs in 2020 due to the pandemic. Now that RMDs are reinstated for 2021, reviewing the rules with your financial advisor can help you avoid a big tax penalty.
RMD timing
The simplest approach for many individuals is to take the first RMD by Dec. 31 in the year they turn age 72 and continue RMDs by Dec. 31 every year after that.
The IRS does allow an alternative approach:
Age 72 RMD. When you turn age 72, take one RMD by April 1 of the year following that birthday and take a second RMD by Dec. 31 of that year. For example, if you turn age 72 in July 2021, you would take your first RMD by April 1, 2022, and your second RMD by Dec. 31, 2022.
Age 73+ RMDs. RMD required annually by Dec. 31.
RMD tax penalty
If you do not take a distribution or if you withdraw less than the required amount, you may have to pay a penalty equal to 50% of the amount not taken. You can take more than the required amount, but the extra withdrawals don't count toward RMDs for future years.
Generally, withdrawals of pretax contributions and earnings are taxed as regular income. Withdrawals of RMDs from inherited Roth accounts are tax-free if certain requirements are met.
Determining RMD amounts
RMDs are determined separately for each of your retirement plans and are required per individual, not per couple. The amount of the distribution is usually based on the IRS Uniform Lifetime Table and the Dec. 31 value of that plan.
A different table is used if you have a spouse beneficiary who is more than 10 years younger than you. In each case, the RMD is calculated by dividing the year-end account value by the applicable life expectancy factor.
RMDs from more than one plan
If you have more than one retirement plan, you must calculate separate RMDs for each plan. However, if you have more than one IRA — whether a traditional, SEP and/or SIMPLE IRA — you can add the RMDs and take the combined distribution amount from any one or more of your IRAs.
Similarly, if you have more than one 403(b) plan, you can take the combined distribution amount from one or more of your 403(b) accounts. You cannot, however, satisfy the RMD for your IRA with a distribution from your 403(b) or vice versa.
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