Don't Forget These New Rules for RMDs

With the federal tax filing deadline pushed back to May 17, advisors have a little more time to get up to speed on the ins and outs of required minimum distributions and certain changes made due to the COVID-19 pandemic.

The Internal Revenue Service issued a recent taxpayer reminder on how RMDs were changed by the Setting Every Community Up for Retirement Enhancement (Secure) Act and the Coronavirus Aid, Relief and Economic Security (Cares) Act, which may affect some clients.

Some good news due to the Secure Act: For those who turned 70 on July 1, 2019, or later, they do not have to take their first RMD until age 72.

(Related: How the Rising RMD Age Could Affect Your Clients)

The bad news is that those with birthdays before that must have begun taking RMDs by age 70.5.

Retirement plans affected by RMDs include 401(k)s, 403(b)s, 457(b), profit sharing and other defined contribution plans. This includes Simplified Employee Pension Plans (SEP) and Savings Incentive Match Plans for Employees (SIMPLE), according to the IRS issuance.

All RMDs in 2020 were waived due to the pandemic.

(Related: IRS Extends Tax Filing Deadline)

Here are some other points to keep in mind as you advise clients on RMDs this year and next:

• One Cares Act provision concerns withdrawals taken in 2020. These can be classified as coronavirus-related and are not subject to the 10% additional tax on early distributions. They are taxable, however, over a three-year period (one-third each year) or can be paid in the year the distribution was taken. This includes withdrawals from inherited IRAs.
• Those who reached age 70.5 by 2020 and were still employed but retired in 2020 would normally have to take an RMD by April 1, 2021. That has been waived through the Cares Act.
• Also waived under the Cares Act are RMDs for those who are still working into their 70s. Typically the April 1 deadline for RMDs is mandatory for all owners of traditional IRAs. However, those still fully employed, if their plan allows, can wait to pay until the April 1 after they retire to start RMDs from these plans.
• The IRS has a calculation for RMDs (the site has examples). Not taking a withdrawal could mean a 50% excise tax on the amount not distributed.
• Those clients who reached 70.5 years old in 2019 or earlier didn’t have to take an RMD in 2020; however, it must be taken for 2021 by Dec. 31. Those who turn 72 in 2021 must take  their first RMD by April 1, 2022 (for 2021’s withdrawal) and then again (for 2022) by Dec. 31, 2022. The IRS recommends that to avoid that double withdrawal on tax forms, the client take a withdrawal on Dec. 31, 2021, instead of waiting until April 1 the following year.
• If a client took an RMD in 2020, they can return it to their account to avoid paying taxes on it. This does not include inherited IRA withdrawals.
• The Cares Act allowed the suspension of retirement plan loan repayments for up to a year. However, repayments typically resumed in January 2021. The IRS says this effectively gives up to six years (instead of five) to repay a typical plan loan.

The changes in RMDs due to the coronavirus response (and just in general) can be confusing. The IRS site includes FAQs, or advisors should work with a certified public accountant or tax specialist.