Minimal payouts required for retirement plans are again – and completely different

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The year-long hiatus for required withdrawals from most 401 (k) plans or individual retirement accounts has expired.

Subject to another unlikely respite from Congress, taxpayers with these retirement plans will have to resume these withdrawals this year.

Last year, the federal law on CARES lifted the obligation to deduct a minimum taxable amount from so-called qualified pension plans such as 401 (k) or IRA. The amount depends on the age of the account holder. For example, a 72-year-old with an IRA of $ 100,000 would normally have withdrawn $ 3,906 last year. The RMD for a 75 year old this year is $ 4,367.

Roth 401 (k) plans that are funded with after-tax dollars are subject to the same RMD rules as traditional 401 (k) and IRA plans, but distributions are not taxed. Account holders must start taking them after the age of 72. The amounts are calculated using the same IRS life expectancy tables.

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The exception is if you continue to work for the company sponsoring the plan after the age of 72 and do not own more than 5% of the company.

You can avoid taking on the minimum distributions in full by rolling a Roth 401 (k) into a personal Roth IRA that is not subject to RMD rules.

For people relying on funds from their cost of living, the rule change likely went unnoticed. The situation is different with pensioners who did not need the money.

“This allowed the money to stay there and grow tax-free longer,” said Ed Zollars, CPA at accounting firm Thomas Zollars & Lynch. “I think most of the people who could afford to skip it [the distribution] last year.”

This is likely not an option this year unless financial markets take another big leap, as they did earlier last year. The suspension of the RMD requirement should give retired taxpayers some relief from the more than 30% decline in stock markets early last year.

The RMD is calculated based on the closing balance of the account at the end of the previous year. When the markets are falling significantly, the RMD represents a much higher percentage of a decreased portfolio and this reduces the ability to recover from large losses.

Michael D’Addio, Principal at Marcum LLP, doesn’t think the Biden government will expand policies that favor wealthy individuals rather than the middle class unless markets become volatile again.

“This market is doing very well, but we don’t know what could happen,” he said. “If there is another big drop, we could be in the same circumstances as last year and Congress could delay or repeal the RMD.”

There will be more laws this year and RMDs could be affected.

Michael D’Addio

Headmaster at Marcum LLP

For now, assume this won’t happen and plan to take your RMD. If you don’t, the tax penalty is a whopping 50% of the required distribution. While calculating the RMD is straightforward, there are a number of quirks and rule changes to be aware of.

• Who has to take RMDs? The SECURE Act of 2019 raised the age at which RMDs must begin from 70½ to 72, and there is discussion in Congress about extending it even further. However, if you turned 70½ in 2019, you had to take your first RMD by April 1, 2020.

With the waiver of the RMD last year, the deadline for these individuals is now April 1st of this year. Retirees who will turn 72 this year can make the distribution at any time during the year or even postpone it until April 1, 2022. If you wait until next year you’ll have to withdraw two RMD which could result in a higher tax bracket.

“I would probably advise people to delay the distribution unless that pushes you into a higher tax bracket for 2022,” Zollars said.

• Change of custodian bank. Retirement account holders who switch custodian in the middle of the year must ensure they receive their RMD. If the distribution was not made by the first custodian, the second cannot do it automatically.

“Some people may not realize they didn’t get the RMD from the first custodian and the second might not ask,” Zollars said. “I’ve never seen this before [IRS] Apply the 50% penalty unless someone is flaunting the law, but you have to be careful. “

• Reverse 2020 RMDs. Along with the suspension of RMDs by CARES last year, the IRS also extended the 60-day rollover period for people who took an RMD before the legislation was passed to withdraw as a Covid to August 31 19-related distribution to consider.

Under these rules, taxpayers or anyone in their household financially affected by the pandemic could withdraw up to $ 100,000 from their pension plans last year with no penalty. You can also record the income for tax purposes over three years and have three years to repay it.

“As long as it’s Covid, it will apply to distributions up to $ 100,000. If you pay it back to your plan, you can change tax returns to get the taxes back too,” D’Addio said.

When you need to take your RMD this year, there is no tax reason to take it sooner or later. The amount of the distribution is based on the value of your account at the beginning of the year, your age and the IRS life expectancy tables. It doesn’t change based on what is happening in the financial markets. For people who think the stock market is overvalued, it might make sense to sell stocks and make the dividend now.

However, D’Addio suggests that people may want to postpone their RMD until the end of the year due to possible additional rule changes. “There will be more laws this year and RMDs may be affected,” he said.

Instead of trying to time the market with your RMD, consider making some changes to the asset allocation within the account. “If you think the market is going to fall sharply, you can sell investments in the account and distribute the money later,” said D’Addio.

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