March 24, 2021

2021 Tax Guide to Required Minimum Distributions

In the last year, there have been several rule changes to retirement plans. Many of these changes have been established to provide economic relief for those affected by the coronavirus. To make it easier for taxpayers, the IRS recently published a list of the most relevant ones. Here’s the breakdown: 

New RMD Age - Owners of traditional IRAs, IRA-based plans (SEP, SARSEPs, SIMPLE IRAs), and employer-sponsored retirement plans must take out a required minimum distribution each year. The age at which you begin taking RMDs is based on your birthday and when you retire. For many people, that age has remained consistent at 70 ½. However the SECURE Act recently updated the age:

If you were born on or before June 30, 1949, you must start taking RMDs the year you turn 70 ½ years old. If you were born after June 30, 1949 you do not have to take your first RMD until you reach age 72.

RMDs Waived in 2020 - Seniors, retirees, and beneficiaries with inherited accounts are not required to take money out of their IRAs and workplace retirement plans in 2020. Those who turned 70 ½ years old before 2020 and were still employed, but terminated employment in 2020, would usually have to take an RMD by April 1, 2021. However, the CARES Act has waived this RMD.

Coronavirus-related Distributions - Specific distributions that occurred between January 1, 2020 and December 30, 2020 from IRAs or workplace retirement plans to qualified individuals are not subject to the usual 10% additional tax on early distributions. Coronavirus-related distributions may be repaid to an IRA or workplace retirement plan within three years to avoid paying taxes on that distribution.

If you repay the coronavirus-related distribution, it will be treated as if it were repaid in a direct trustee-to-trustee transfer so federal income tax is not owed on the distribution.

Coronavirus-related Loans - If you are a qualified individual and the plan sponsor has offset your loan balance against your benefit, you can treat the loan offset as a coronavirus-related distribution. You will then have three years to repay to an IRA or include in income tax ratable over three years. 

  • Plan Loans - Generally, the employee must repay a plan loan within 5 years. However, the CARES Act allows plans to suspend loan repayments for up to one year, giving you up to 6 years to repay a typical plan loan. Usual repayments resumed in January 2021. 
  • Loan Limit Increase - Per the CARES Act, employers may increase the maximum loan amount available to qualified individuals. For plan loans made between March 27, 2020 and September 22, 2020, the limit may increase to the lesser of: (a) $100,000 (minus outstanding plan loans of the individual) (b) the individual’s vested benefit under the plan. 

Rollovers - Typically, an account holder can only make one rollover per 12-month period. However, IRS Notice 2020-51 waived this rule and the restriction on rollovers to inherited IRAs for repayments made by Aug. 31, 2020.

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