Your IRA RMDs in 2021

If you are an owner of an IRA or you inherited an IRA, you must take required minimum distributions (RMDs) according to tax rules. The failure to do so may result in a 50% penalty. Because of COVID-19, the CARES Act waived required minimum distributions for 2020. However, various law changes as well as the waiver may impact your distributions for 2021.

Figuring 2021 RMDs

Required minimum distribution (RMD) rules apply for 2021, despite the ongoing pandemic. This means that distributions for 2021 generally must be withdrawn no later than December 31, 2021.

The distribution for 2021 is based on the value of the account as of December 31, 2020 (not December 31, 2019, even though the RMD for 2020 was waived). Check the 2020 year-end statement from the financial institution holding your account. Many institutions provide RMD calculations, instructing you what to withdraw for the year. You may want to check the numbers or have a tax professional do this for you.

The change in the required beginning date for born after June 30, 1949, means that the first RMDs apply in 2021 for some individuals. For example, your 70th birthday was July 1, 2019. You reach age 70½ after December 31, 2019, so you are not required to take a minimum distribution until you reach 72. You reached age 72 on July 1, 2021. You must take your first RMD (for 2021) by December 31, 2021, or postpone it to January 1 through April 1, 2022, but if you postpone it, you will have to report two distributions for 2022 because your second RMD (the RMD for 2022) must be received by December 31, 2022.

If you were born in the first six months of 1949 and delayed the first distribution otherwise due by December 31, 2019, to April 1, 2020, this RMD was waived. Figure your 2021 RMD using your account balance as of the end of 2020.

IRA accounts inherited from a person who died before January 1, 2020

Beneficiaries who inherit accounts from persons who died before 2020 generally have two ways in which to figure their RMDs:

• Take annual distributions. They may use their own life expectancy (taken from the Single Life Table (Table 1, Appendix B, Publication 590-B) to figure their annual distributions.
• Use a 5-year rule. No annual distributions are required (though you may take whatever you want). But if you are a beneficiary who is using the 5-year rule for your RMDs from an inherited account, you must withdraw all of the funds from the account by the end of the fifth year following the year of the account owner’s death. Just ignore 2020. In effect, you have 6 years from the end of the year following the year of death to withdraw all of the funds from the account.

Spouses may roll over inherited accounts and treat them as their own. This means taking RMDs as they would for any account belonging to them.

IRA accounts inherited from a person who dies after December 31, 2019

While no distributions were required in 2020, new rules dictate distributions now.

• Eligible designated beneficiaries (e.g., surviving spouse, a disabled individual, a chronically ill individual, a minor child, or an individual who is not more than 10 years younger than the account owner) may take distributions over their life expectancies. A minor child may use this life expectancy rule only until obtaining the age of majority and is then treated as a non-eligible designated beneficiary subject to the 10-year rule; see below.
• Designated beneficiaries who are not eligible designated beneficiaries do not have to take annual distributions but must withdraw the entire account by the end of the 10^th year following the owner’s post-2019 death.
• Non-designated beneficiaries (beneficiary is not an individual, such as the owner’s estate) must withdraw the entire account by the end of the fifth year following the year of the IRA owner’s death if death was before the required beginning date. If the owner’s death was on or after the required beginning date, distributions are payable over the owner’s remaining life expectancy.

Conclusion

As if things weren’t confusing enough, just wait for 2022. That’s when new life expectancy tables go into effect. They change the RMD computations for those already taking RMDs as well as those who begin to take then in 2022.