Remember the required minimum distribution (RMD) rules and the recent changes that have been made to them, the IRS reminds. It issued the reminder in a March 16 news release that highlights those changes.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the age when individuals must begin taking withdrawals from their retirement accounts. Someone born on or before June 30, 1949, was required to start getting RMDs for the year they reached the age of 70½. However, under the SECURE Act, if a person’s 70th birthday is July 1, 2019, or later, they do not have to take their first RMD until the year they reach age 72.
Individuals who reached age 70½ in 2019 or earlier did not have an RMD due for 2020; however, for 2021, they will have an RMD due by Dec. 31, 2021.
Individuals who did not reach age 70½ in 2019 will reach age 72 in 2021 will have their first RMD due by April 1, 2022, and their second RMD due by Dec. 31, 2022. The IRS notes that to avoid having both amounts included in income for the same year, a taxpayer can make the first withdrawal by Dec. 31, 2021, instead of waiting until April 1, 2022. After the first year, all RMDs must be made by Dec. 31.
An IRA trustee must either:
- report the amount of the RMD to the IRA owner, or
- offer to calculate it for the owner.
Calculating the amount of the RMD depends on: (1) the type of IRA or (2) if they are from multiple accounts. Not taking a required distribution, or not withdrawing enough, could result in a 50% excise tax being imposed on the amount not distributed.
Though the April 1 deadline for taking the first RMD is mandatory for all owners of traditional IRAs, participants in workplace retirement plans who are still working usually can, if their plan allows, wait until April 1 of the year after they retire to start receiving distributions from these plans.
Individuals who reached age 70½ before 2020 and were still employed, but who terminated employment in 2020, under ordinary circumstances would have had a 2020 RMD due by April 1, 2021, from their workplace retirement plan. However, this RMD is waived under the Coronavirus, Aid, Relief and Economic Security (CARES) Act.
The IRS suggests that employees of public schools and certain tax-exempt organizations should check with their employer, plan administrator or provider regarding how to treat these accruals.
Coronavirus-Related Distributions and Loans
The CARES Act made it easier for those affected by the coronavirus to access savings in IRAs and workplace retirement plans.
Distributions. Certain distributions made from Jan. 1, 2020, through Dec. 30, 2020, from IRAs or workplace retirement plans to qualified individuals may be treated as coronavirus-related distributions. Such distributions are not subject to the 10% additional tax on early distributions, including the 25% additional tax on certain SIMPLE IRA distributions.
Taxes on coronavirus-related distributions are includible in taxable income either (1) over a three-year period, one-third each year, or (2) in the year a distribution is taken.
Coronavirus-related distributions may be repaid to an IRA or workplace retirement plan within three years.
Loans. If there is an outstanding loan balance when employment ends, the IRS notes, a plan sponsor usually will offset the balance against a participant’s account. It adds that:
- For loan offsets in 2020, one has until the due date of the tax return (plus extensions) to repay that amount to another retirement plan or IRA.
- A qualified individual can treat the loan offset as a coronavirus-related distribution and have three years to repay to an IRA or include in income tax ratably over three years.
An IRA owner or beneficiary who received an RMD in 2020 could return it to their account or other qualified plan to avoid taxes on that distribution. However, RMDs in 2020 that were not rolled over or repaid may be eligible to be treated as coronavirus-related distributions for qualified individuals. And a 2020 RMD that otherwise qualifies as a coronavirus-related distribution may be repaid over three years, or the taxes due on the distribution can be spread over three years.
A withdrawal from an inherited IRA to a qualified individual also may be a coronavirus-related distribution. Income from the withdrawal may be spread over three years for income inclusion; however, the withdrawal may not be repaid to the inherited IRA.
Notice 2020-51 provided that the one rollover per 12-month period limitation and the restriction on rollovers to inherited IRAs did not apply to repayments made by Aug. 31, 2020; however, the RMD suspension did not apply to qualified defined benefit plans.
The CARES Act included special rules for plan loans made to qualified individuals. Plans could suspend loan repayments for up to one year; however, typically, repayments resumed in January 2021. This effectively gives up to six years, instead of five, to repay a typical plan loan.