If you’re old enough to be taking required minimum distributions (RMDs) from your IRA, you’ll remember the steep drop in the stock market around this time last year that precipitated legislation to waive all RMDs for 2020. Had RMDs been required to be taken, IRA owners would have had to lock in some of the investment losses generated early in 2020. The IRS and Congress then issued several subsequent IRA-related changes throughout 2020 that, when combined with a law change from 2019, make it rather challenging to determine which changes were temporary, which are permanent, and how to apply the RMD rules going forward. Here’s a brief review of the IRA-related relief effective in 2020 and what that means for RMDs in 2021 and future years.
2020 RMD Waivers and Other Relief
The CARES Act waived all RMDs for the calendar year 2020. Both IRA owners and beneficiaries who would have been required to take a distribution from their IRA under the RMD rules did not have to take a distribution. This includes those who
- Were waiting to take their 2019 RMD until sometime before April 1, 2020
- Had a 2020 RMD due by December 31, 2020 or
- Had a 2020 first-year RMD due by April 1, 2021
For beneficiaries who had previously elected to deplete their inherited IRAs within five years, the RMD waiver for 2020 also took the calendar year 2020 out of the five-year calculation, granting these beneficiaries six years to deplete an inherited IRA.
Those who took an RMD in 2020 despite the waiver had an opportunity to put it back in the IRA within the later of 60 days following the distribution or August 31, 2020.
Another form of RMD-related relief provided in 2020 was available if the IRA owner or a family member had their health or finances affected by COVID-19. Individuals who met the requirements for a coronavirus-related distribution (CRD) could take three years to repay that RMD or any other distribution up to $100,000 taken in 2020. The taxation on those distributions could also be spread over three years. This is an election that must be made when filing the 2020 federal tax return.
RMDs Back On for 2021, With Changes
With a light at the end of the COVID-19 tunnel, and the stock market back to “normal,” RMDs must resume for 2021. Whether an IRA owner took an RMD in 2020, chose to roll it back into the IRA, or is taking a three-year spread on the taxation has no effect on the RMD due for 2021 or how it will be calculated. What has changed for 2021 and future years, however, is the starting age for RMDs. It used to be age 70½, now it’s age 72. This change took effect in 2020, but because RMDs weren’t required to be taken in 2020, there is some confusion as to RMD starting ages and dates.
- If you were born before 1949, you were age 70½ by December 31, 2019, and were required to begin taking RMDs at age 70½. Although you didn’t have to take an RMD in 2020, you must now resume taking RMDs each year by December 31. If you took and kept an RMD in 2020, it does not count as credit toward your 2021 RMD.
- If you were born in 1949, you may be subject to the 70½ starting age or the 72 starting age depending on your birthday.
If you were born January 1 – June 30, 1949, you reached 70½ in 2019 and you are subject to the age 70½ rule. Your first RMD would have been due for 2020, by April 1, 2021 – but that RMD was waived. Your next RMD will be due by December 31, 2021.
If you were born July 1 – December 31, 1949, you are subject to the age 72 rule. Your first RMD is required for 2021, and you have until April 1, 2022, to take your first RMD. All subsequent RMDs must be taken by December 31 of the year for which they are due.
If you were born in 1950 or later, you will begin taking RMDs for the year you reach age 72. You have until April 1 of the year following the year you turn 72 to take your first RMD. After the first year, RMDs must be taken by December 31 of the year for which they are due.
RMD Changes Effective in 2022
Determining who must take an RMD in 2022 should be much less complex. There will be another change to RMDs, however, that takes effect in 2022. This change affects the calculation used to determine the dollar amount that must be removed each year. The amount of your RMD is calculated using your December 31 account balance from the prior year and a life expectancy factor based on your age in the year for which the RMD is due. These factors are found in life expectancy tables published by the IRS. These tables have been updated to account for longer life expectancies. The new tables will be used for calculating RMDs and beneficiary payments beginning in 2022. Use of the new life expectancy factors will result in slightly smaller required distributions.
Mainstar Trust Can Help
Each year you have an RMD due, Mainstar Trust will notify you of your distribution requirement. If you have any questions about your RMD, please contact us at 1-800-521-9897 or customerservice@mainstartrust.com.