Recent Changes To Retirement Plan Distribution Rules

Under the federal tax code, retirement plan account owners are usually required to begin taking required minimum distributions (RMDs) when they turn 70 and one-half or 72 years old, depending on their birth date and when they retired. Not all retirement plans require RMDs, but many do, including traditional employee pensions and 401(k) plans. The Coronavirus Aid, Relief, and Economic Security (CARES) Act made some important changes to these rules, so if you have a retirement plan and have questions about how these changes could affect your own financial situation, you should reach out to an experienced Florida tax & IRS attorney for help.

Which Retirement Plans Require RMDs?

Retirement plans that typically require required minimum distributions include:

• Traditional contribution plans;
• Simplified Employee Pension Plans (SEPs);
• Savings Incentive Match Plans for Employees (SIMPLE);
• Individual retirement accounts;
• 401(k) plans;
• 403(b) plans;
• 457(b) plans;
• Profit sharing plans; and
• Defined contribution plans.

Under federal law, individuals are required to start taking withdrawals from these types of accounts starting the year that they turn 70 and one-half years old, unless the person’s 70th birthday was July 1, 2019, in which case, RMDs don’t need to start being withdrawn until they turn 72.

Changes Made by the CARES Act

In 2020, Congress passed the CARES Act, which waived all RMDs during 2020. The waiver applied to seniors, retirees, and beneficiaries of inherited accounts, all of whom were deemed exempt from taking funds out of their IRAs and workplace retirement plans. As a result of these changes, individuals who turned 70 before 2020 and were still employed, but who did eventually terminate their employment in 2020, were also allowed to forego a 2020 RMD withdrawal, which would typically have been due in April of this year.

2021 RMDs

If you turned 70 and one-half in 2019 or earlier, but didn’t have an RMD due for 2020, you will still most likely need to withdraw an RMD for 2021 by December 31st of this year. Similarly, those who didn’t reach this age in 2019, but will turn 72 years old in 2021 will still need to make their first RMD withdrawal by April 1, 2022. However, taxpayers who wish to avoid having both amounts counted towards their income, can instead make their withdrawal by December 31, 2021, rather than waiting until the following year.

It’s also important to note that qualified individuals who collected distributions between January 1st and December 30th of 2020 from IRAs and workplace retirement plans will not be taxed the additional ten percent that is normally assessed for early distributions. This is because these distributions qualify as coronavirus-related distributions. These kinds of RMDs can be repaid over a three year period. Alternatively, the account holder could have the taxes owed on that amount spread over the same period of time.

Did You Take Out an RMD in 2020?

Please call 386-490-9949 if you have questions about the COVID-19-related changes to the rules regarding required minimum distributions. Dedicated tax & IRS lawyer Ronald Cutler, P.A. is standing by to address your concerns.

Resource:

irs.gov/newsroom/coronavirus-relief-for-retirement-plans-and-iras#collapseCollapsible1600782435464