Required minimum distributions on retirement plans are back — and different
The one-year hiatus on required withdrawals from most 401(k) plans or individual retirement accounts is over.
Barring another unlikely reprieve from Congress, taxpayers with these retirement plans must resume those withdrawals this year.
Last year, the federal CARES Act suspended the requirement to withdraw a minimum taxable amount from so-called qualified retirement plans like a 401(k) or IRA. The amount is based on the age of the account holder.
Roth 401(k) plans, which are funded with after-tax dollars, are subject to the same RMD rules that traditional 401(k) and IRA plans are, but the distributions are not taxed. Account holders must begin taking them after they turn 72 and the amounts are calculated using the same IRS life expectancy tables.
For people relying on funds from their plans for living expenses, the rule change probably went unnoticed. It’s a different story for retirees who didn’t need the funds.
“It allowed the money to stay there and continue growing tax-free for a longer period,” said Ed Zollars, a CPA with accounting firm Thomas Zollars & Lynch. “I think most people who could afford to skipped [the distribution] last year.”
That’s probably not an option this year, unless financial markets take another major dive, as they did early last year. The suspension of the RMD requirement was intended to provide retired taxpayers relief from the more than 30% drop in the stock market early last year.
The RMD is calculated based on the closing balance of the account at the end of the previous year. When the markets drop significantly, the RMD represents a much higher percentage of a diminished portfolio and that reduces the ability to recover from big losses.
Michael D’Addio, a principal at Marcum LLP, doesn’t think the Biden administration will extend a policy that largely favors high-net-worth individuals rather than the middle class unless markets become volatile again.
“This market is doing very well, but we don’t know what could happen,” he said. “If there is another big drop, we could be in the same circumstance as last year, and Congress might delay or waive the RMD again.”
For the time being, assume that won’t happen and make plans to take your RMD. The tax penalty if you don’t is a whopping 50% of the required distribution. The SECURE Act of 2019 raised the age when RMDs must begin to 72, from 70½ and there is discussion in Congress about extending it still further. While the calculation of the RMD is straightforward, there are a number of quirks and rule changes to keep in mind. Contact your tax advisor for specific details on how you personally are affected.
As for when to take your RMD this year, there is no tax-related reason to take it earlier or later. The amount of the distribution is determined by the value of your account at the beginning of the year, your age and the IRS life expectancy tables.
D’Addio, however, suggests that people may want to defer their RMD until the end of the year because of possible additional rule changes. “There will be more legislation this year and RMDs could be affected,” he said.
Rather than trying to time the market with your RMD, you’re better off making some asset allocation changes within the account. “If you think the market will drop precipitously, you can sell investments in the account and distribute the cash later, D’Addio said.
By: Andrew Osterland, CNBC.com https://www.cnbc.com/2021/03/01/required-minimum-distributions-on-retirement-plans-are-back.html
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