A common topic with our clients at their financial reviews is Required Minimum Distributions or RMDs.  For those clients that haven’t had to take these distributions yet, they often have many questions.  People may wonder, what is an RMD?  These are required distributions that you must take from certain retirement accounts.  Another question is, why am I required to take the money out of my account?  Simply put, the IRS wants to receive taxes from these untaxed funds, so they make you take a small percentage, based upon your age and the account value at the end of the prior calendar year, out of the account annually.   

The SECURE Act that was passed in 2019 brought about a few changes to Required Minimum Distributions.  As it stands today in 2021, here are some important rules to remember. 

  1. Applicable accounts.  RMDs only effect IRAs and retirement accounts such as Simple IRAs, SEPs, and 401(k)s.  There are different rules for employees and business owners depending upon whether you are still working and if you are an owner of the company, so it’s best to check if an RMD applies to your account.  RMDs do not apply to Roth IRAs. 
  1. Age.  The SECURE Act changed the age when you begin taking RMDs from 70 ½ to age 72.  Currently, there is legislation being considered that may postpone that age even longer, but for now, know that it is in force at age 72.  
  1. Calculation.  The RMD is calculated based upon the retirement account value on December 31st of the prior year.  So, for 2021, they will look at the account value on December 31st, 2020, to determine how much you will have to withdraw. The first year you are RMD eligible, the distribution is approximately 3.5% of your account value, and the percentage increases annually from there.  
  1. Taxes.  The money inside these accounts has never been taxed.  That’s why the IRS requires you to take a withdrawal, or distribution, from your account.  Since the entire distribution will be added to your taxable income for the year, we encourage clients to withhold taxes when taking these withdrawals.  That way, you are not stuck owing a big tax bill the following April. 
  1. Deadline.  Generally speaking, you have until December 31st every year to take your distribution.  In 2020, RMDs were waived, but for 2021, they have been reinstated, so anyone 72 or older must take their 2021 RMD.  The first year you become RMD eligible, the IRS does give an extension until the following April 1st.  However, if you wait until April 1st, you will have to take two withdrawals in one tax year.  Therefore, we don’t encourage clients to delay their first year’s distribution. 
  1. Penalties.  There is a 50% penalty on any RMD amounts not withdrawn.  You read that right – 50%!  That’s why it’s so important to ensure that the full RMD is distributed each year. 

Like most things in life, the only constant is change, and RMDs are no exception.  The rules regarding RMDs can change year to year, so it’s important to stay updated on any IRS changes and to monitor these financial obligations.  At Hovis & Associates, we review each eligible clients’ accounts and work with them to ensure they take the necessary distributions to avoid a penalty.  If you have questions, we are here to help.  Call our office to schedule an appointment.