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Understanding the Ever-Changing RMD Rules

By Jane Young

It was nice having a break from required minimum distributions (RMD) in 2020 but unfortunately, they are required for 2021.  As a reminder, back in 2019 the SECURE Act was passed changing the age to start taking RMDs on retirement accounts from 70 ½ to 72.  With exception to certain beneficiaries such as spouses, the SECURE act also eliminated the ability to “stretch” distributions on beneficiary IRAs.   Beneficiaries of individuals who died in 2020 or later must distribute their beneficiary IRAs within 10 years.

Individuals who are over 72 must take their RMD by December 31st of each year.  If you are turning 72 this year, you have until April 1, 2022.    You may want to take it by December 31st, 2021 to avoid taking two distributions in one year which could result in a higher tax liability.  Failure to take your RMD will result in an excise tax of 50% of the required distribution.

Your RMD is generally determined by dividing the value of your retirement account on December 31st of the previous year by the distribution period from the IRS’s “Uniform Lifetime Table”.  There is some good news, due to longer life expectancies, on November 6th the IRS released new life expectancy tables that will go into effect in 2022.   The new tables will lower your RMD resulting in less taxes and more money remaining in your retirement accounts.   Someone turning 72 in 2022 can expect to see a 6-7% decrease in their RMD with the new tables.  Unfortunately, your 2021 RMD will be calculated using the current tables.

An RMD from a traditional retirement account is taxable as regular income which increases your adjusted gross income (AGI).  Due to the CARE’s Act waiver on RMDs in 2020, you may have experienced a major decrease in income which can ripple throughout your return.  A decrease in AGI may result in less tax on Social Security benefits, reduced Medicare premiums and a lower capital gains rate.  A decrease in income may also place you in a lower tax bracket.  

While a reduction in taxes is great news for 2020, it could adversely impact tax planning for 2021.   Most tax preparation programs calculate your 2021 estimated taxes based on 2020 information.  If your income was significantly lower as a result of not paying an RMD in 2020, your projected estimated taxes may be understated.  Consider doing some tax planning for 2021 to avoid a big tax bill next April.

If you are interested in donating money to charity this may be an ideal year to make a tax-free distribution from your RMD.  If you are 72 or older you can use your RMD to make a Qualified Charitable Deduction of up to $100,000.  A Qualified Charitable Deduction is not included in your adjusted gross income.   The distribution must be made directly from your IRA custodian to a qualified charity.