Changes to Required Minimum Distributions

By: Mengjiao (Sherry) Yao, CPA, Supervisor

[Notice: Some of the information in this blogpost is no longer relevant. Click here to read our latest post for updates to the RMD.]

There were several pieces of major legislation in late 2019 and early 2020 that had an impact on retirement savings, specifically as it relates to the Required Minimum Distribution, or RMD for short. This blogpost reviews the Required Minimum Distribution rules and how major changes may affect you and your retirement savings.

What is a Required Minimum Distribution (RMD)?

If you have tax-deferred retirement accounts like an Individual Retirement Account (IRA) or 401K retirement plan account, you do not have to pay taxes until you withdraw funds from the account. However, the IRS says that you cannot keep retirement funds in your account indefinitely, so, once you reach a certain age, you are required to withdraw a calculated amount each year. This is what we mean by a Required Minimum Distribution or RMD.

Your required minimum distribution is the minimum amount you must withdraw from your account each year. Your withdrawals will be included in your taxable income except for any part that was taxed before or that can be received tax-free, such as a qualified distribution from designated Roth accounts.

Taking the RMD is a requirement and not an option, even if you are still working. If you do not take the RMD each year, the IRS charges a 50% penalty on the RMD amount not taken. (Note: This penalty was waived in 2020.)

How does RMD work?

Under the original RMD guidelines, once you reached age 70 ½ you were required to take an annual minimum distribution from your tax-deferred retirement account by April 1^st of the following year. Then, in subsequent years, you were required to take an annual distribution by December 31^st of that year.

In addition, beneficiaries who inherited an IRA account could stretch out the RMDs over the course of their lifetime.

SECURE Act Changes to the RMD

There were several key changes made to the RMD as a result of the SECURE (Setting Every Community Up for Retirement Enhancement) Act – passed in late 2019:

• The start age to take the RMD was changed to 72 for individuals who turned 70 ½ after December 31, 2019
• Beneficiaries who inherit IRAs are required to take out all RMDs within the 10 years following the death of the owner. There are some exceptions to this rule, for example a spouse or minor. In their case, the requirement does not apply.
• The SECURE Act also changed a popular IRA distribution option called the Qualified Charitable Distribution (QCD). Prior to the Act, if you were RMD age eligible you could direct money from an IRA to a charity, foundation, or other non-profit organization.
• If you did that and you didn’t touch the money, you didn’t have to pay any tax on it. It’s become more popular since the tax reform. The standard deduction is much higher now and a lot of people can’t deduct charitable donations on their tax returns; hence, this can give you an option to help the charity and save on paying taxes at the same time. 
• While the SECURE Act changed the start age to 72, you can still make a qualified charitable distribution beginning at age 70 ½. This can be a good tax planning strategy if you are trying to reduce the balance in your IRA account.
• Finally, under the original RMD rules, you could no longer contribute to tax-deferred retirement accounts once you turned 70 ½. The SECURE Act allows you to continue contributing to your tax-deferred account so long as you have earned income.

CARES Act Changes to the RMD

The CARES (Coronavirus Aid, Relief, and Economic Security) Act was enacted in March 2020. Key changes to the RMD included the following:

• Required minimum distributions were waived in 2020 for IRAs and retirement plans, including beneficiaries with inherited accounts. The waiver includes RMDs for individuals who turned age 70 ½ in 2019 and took their first RMD in 2020.
• If an individual had already taken an RMD in 2020, including someone who turned 70 ½ in 2019, the individual had the option of returning the distribution to their account or to another qualified plan.
• An IRA owner or beneficiary who already received an RMD in 2020 was allowed to repay the distribution to the distributing IRA no later than August 31, 2020 to avoid paying taxes on that distribution.

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For more information

It’s important to stay abreast of rules regarding RMDs in order to safeguard and protect your retirement savings. To learn more about RMDs and recent changes, visit IRS.gov https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds Or contact your Cover & Rossiter CPA or financial advisor to get answers to your questions.