Taking Care of Business
2021 Required Minimum Distributions
by Paul C. MacDonald, CLU, ChFC, EA
Tax season comes and goes each year on or about April 15th and with it comes the opportunity for income tax planning. It is also an important time of year to make sure everything is in order with your finances, and most importantly – that you’ve abided by any IRS regulations that might impact you.
For most of our working lives, we are putting money away into employer-sponsored retirement plans or Individual Retirement Accounts (IRAs), letting it sit invested and grow on a tax-deferred basis. The money going into these types of plans is pre-tax money, and it continues to grow inside of that tax-sheltered account for the entirety of our working years. But the IRS will only allow that money to stay in there for so long before they require you to start taking some of it out and paying the taxes on your distributions.
At a certain age, the IRS mandates that you withdraw your Required Minimum Distribution (RMD) on an annual basis. The magic number used to be age 70 ½, but the SECURE Act of 2019 increased the RMD age from 70½ to 72 years. Now the SECURE 2.0 Act of 2022 is once again delaying the RMD age—from 72 to 73—starting in 2023. And wait, there’s more. In 2033, the RMD age will increase to age 75.
This means that from now until 2033, by April 1st of the year after you turn 73 years old, you must start taking money out of your tax-deferred retirement accounts. The amount you must take out is determined by using the account value as of December 31st of the prior year, and a life expectancy factor that the IRS publishes in a table. It is important to ensure you withdraw the correct amount not only so there is no trouble with the IRS, but to avoid the penalty of not withdrawing your full Required Minimum Distribution. If you do not take out at least your RMD, the penalty owed to the IRS is 50% of what you were supposed to withdraw, plus the taxes on the original required amount – a hefty penalty that can be prevented with proper planning!
Another outcome of the SECURE Act of 2019 was the change regarding distributions from Inherited IRAs. If you have inherited an IRA from any family member other than your spouse since the SECURE Act came about, it must be drawn to zero within 10 years. Although this means there is no amount that must be taken out annually, it is essential to carefully plan when the distributions will be made and the taxes will be paid so you are not faced with a huge, unexpected tax liability one year. So before the year is over, make sure that you, your parents, grandparents – whoever it might be – have handled their financial responsibilities for the year. Not only will it take a burden off your shoulders, but it will make the time spent with family and friends that much more enjoyable knowing you’ve taken care of business.