We don’t need to tell you that this year was any different from most of the others, starting with a global pandemic, controversial presidential elections and protests against racial injustices. This is also different from a financial and tax point of view: you don’t have to make any required minimum payouts from your qualifying plans and IRAs this year.
In particular, the RMD rules for qualified Plan and IRA participants, including those with inherited accounts, have been suspended by federal law for the 2020 tax year. However, subject to later legislation, you will have to resume or start RMDs under a new set of rules in 2021.
Background: Tax law provides a penalty for failing to withdraw RMDs in a timely manner from qualified plans such as 401 (k) plans, retirement plans, and 403 (b) plans and traditional IRAs. (This does not apply to Roth IRAs while the participant is alive.) The penalty is a whopping 50% of the amount that should have been deducted on distributions in addition to regular income tax. The distributions are taxed at ordinary income rates, which are currently 37%.
The withdrawal amount required is based on the life expectancy tables provided by the IRS and your account balance on the last day of the previous year. For example, RMDs for 2020 should be based on account balances as of December 31, 2019. Note: The IRS just updated the tables to reflect the longer life expectancy. These revised tables will come into effect in 2022.
While withdrawals from Qualifying Plans and IRAs are not considered “net investment income” (NII) for 3.8% tax purposes, these distributions add to your modified adjusted gross income (MAGI) as part of the NII tax calculation
In general, you must take RMDs by a “required start date” (RBD). Before 2020, the RBD was April 1st of the year after the year in which you turned 70½ years old. However, with the Setting Every Community Up to Retirement Enhancement (SECURE) Act, RBD has been postponed to April 1 of the year following the year you turned 72 from 2020.
Therefore, under the SECURE Act for the 2020 tax year, you did not have to take RMD if you turned 70 on December 1, 2020. However, this quickly became a moot point.
New legislative update: Coronavirus Aid, Aid and Economic Security (CARES) Act, passed shortly after the SECURE Act, completely overruled RMD rules for 2020, even for those who have inherited accounts from participants who went beyond their RBD. However, the provision of the CARES Act is a one-time redress. Expect to have to take RMDs in 2021 if required by applicable RBD.
Note that there is no need to withdraw RMDs from an account. You can split the distributions however you like as long as the total equals or exceeds the required amount. This gives you flexibility in choosing which accounts you want to raid.
Of course, if you need extra cash over the vacation, you can still withdraw funds from your qualifying plans and IRAs later this year. Just think about the tax consequences.