Don’t Wait Until New Year’s Eve to Take Your 2021 RMD

Don’t Wait Until New Year’s Eve to Take Your 2021 RMD



What is an 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.



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RMD Penalty

The penalty for failing to take the required minimum amount is 50% of the amount that should have been withdrawn but wasn’t. The penalty can be waived where the failure to take the required distribution was due to reasonable cause and steps are being taken to remedy the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. 



See this related post from Dennis Harabin: 15 Most Commonly Encountered Tax Penalties That YOU Can Avoid
To prevent an individual from investing in tax-deferred retirement plans, including traditional IRAs, but never withdrawing funds from the plans (which would mean the government wouldn’t ever collect taxes on the retirement funds), retirees must take an RMD each year after reaching the mandatory RMD age. The mandatory distribution age is currently 72. Failing to take the correct minimum distribution (also known as excess accumulation) results in a penalty of 50% of the difference between what should have been withdrawn and what was actually withdrawn. However, the IRS generally is very liberal about abating the penalty in most situations when corrective action is taken. 

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 on the taxpayer’s life expectancy determined from the Uniform Lifetime Table for the taxpayer’s current age.  




2021 RMD Table



Example: Don’s oldest age during 2021 is 75 and he has a single IRA account with a value of $150,000 at the close of the business day on December 31, 2020. Using the Uniform Lifetime Table for years through 2021, we find that the distribution period for age 75 is 22.9 years. Thus, Don’s RMD for 2021 is $6,550 ($150,000/22.9).

Where an owner of a retirement plan or an IRA dies before receiving his or her entire RMD in the year of death, the unpaid amount must be distributed to the named beneficiaries or, if none, the decedent’s estate. 

Where an individual has multiple retirement plans and/or IRAs some additional complications may be encountered as to which accounts the distributions must be withdrawn from. Note that distributions from a 401(k) or other qualified retirement plan can’t be used to satisfy the RMD of an IRA or vice versa.


See this related post from Dennis Harabin: The Different Ways to Pay Your Taxes
Tap a Retirement Account This is possibly the worst option for obtaining funds to pay your taxes because you are jeopardizing your retirement lifestyle and the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. In addition, if you are under age 59½, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further.

If you need to make your 2021 RMD by December 31 and haven’t yet done so, keep in mind that the 31st, a Friday, will be observed as the New Year’s holiday by many financial institutions. So, a word to the wise: don’t wait until New Year’s Eve to arrange for the distribution.   

If you need assistance related to your RMD, please contact this office at 551-249-1040.

Dennis Harabin at Relax Tax is an expert in taxes, insurance, and debt. Contact him today!

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