The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) have made several important changes to required minimum distributions (“RMD’s”) which were effective in 2020, including the waiver of RMD’s and increasing the applicable age from 70 ½ to 72. Currently, no waiver extension has been made for 2021 and later years, and RMD’s are once again applicable to IRA account holders, and participants in retirement plans.
RMD rules, more fully discussed below, apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. RMD rules also apply to traditional (non-Roth) individual retirement accounts (“IRAs”) and IRA-based plans such as self-employed persons (“SEPs”), SARSEPs, and SIMPLE IRAs. RMD rules can also apply to Roth 401(k) accounts, but do not apply to Roth IRAs while the owner is alive.
RMD’s are minimum amounts that a retirement plan account owner must withdraw annually, starting with the year that you reach 72 (70 ½ if you turned 70 ½ before January 1, 2020). The first payment can be delayed until April 1 of the year after the age requirement is met.
- Example #1 – you reached age 70 ½ in 2019. Your RMD’s that would have been due in 2020 was waived by the CARES Act. Your 2021 RMD would have been due by December 31, 2021, based on your account balance on December 31, 2020.
- Example #2 – you reached age 72 in 2021 (and didn’t reach 70 ½ in 2019). Your 2021 RMD is due by April 1, 2022, based on your account balance on December 31, 2020. Your 2022 RMD is then due by December 31, 2022, based on your account balance on December 31, 2021.
If the retirement account owner is still employed by the plan sponsor and not more than a 5% owner of the employer, RMD’s can be delayed until retirement. However, RMD’s are always required from traditional IRAs, SEP, SIMPLE, and SARSEP IRA plans even if still employed.
- Example #3 – you are currently employed, have met the age requirement, and are a participant in the company 401(k) plan in which you owe less than 5% of the company. Your RMD’s for the company 401(k) can be delayed until retirement. You may continue making salary deferrals and are eligible to receive employer contributions. You are still required to take RMD’s from traditional IRAs.
- Example #4 – you are currently employed, have met the age requirement, and are a participant in the company 401(k) plan in which you owe more than 5% of the company. You are required to make RMD’s for the company 401(k). You may continue making salary deferrals and are eligible to receive employer contributions, even if you are received RMD’s.
- Example #5 – you left your job in 2021 and rolled over your workplace retirement account into your IRA. Your IRA RMD for 2021 will not be affected by the rollover since it is based on the account balance on December 31, 2020. Any 2021 RMD due from your workplace retirement plan cannot be rolled over.
RMD’s and Inherited IRAs
When a retirement plan account owner or IRA owner, who dies before January 1, 2020, dies before RMD’s have begun, generally, the entire amount of the owner’s benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner’s death, or (2) over the life of the beneficiary starting no later than one year following the owner’s death.
For retirement plan owners or IRA owners who die after December 31, 2019, the SECURE Act requires the entire balance of the participant’s account is distributed within ten years. There is an exception for a surviving spouse, a child who has not reached the age of majority, a disabled or chronically ill person, or a person not more than ten years younger than the employee or IRA account owner. The new 10-year rule applies regardless of whether the participant dies before, on, or after, the required beginning date, now age 72.
Penalties resulting from failure to withdraw the full RMD, or failure to withdraw by the applicable deadline, are taxed at 50% of the shortfall. Recent proposals made under the Securing a Strong Retirement Act of 2021 (“SECURE Act 2.0”) would reduce the penalty from 50% to 25%. You can learn more about these proposed changes here.
Penalties may be waived if the account owner establishes that any shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. To qualify for penalty relief, you must file Form 5329 and attach a letter of explanation. More information can be found in the form instructions.
If you have any questions on RMD’s and the changes made by the CARES and SECURE Acts, please do not hesitate to reach out to us for assistance.