There are important RMD changes for 2021 that every 401(k) investor needs to know about to avoid penalties.
Required minimum distributions (RMDs) are IRS-mandated withdrawals from retirement accounts.
The IRS requires these withdrawals to ensure that taxes are paid on amounts that were contributed on a pretax basis, plus any tax-deferred earnings in those accounts over the years.
Should you fail to take the required RMD, you will pay steep penalties.
If you’re wondering if you have to take RMDs in 2021, the answer is YES.
The stipulations in the CARES Act no longer apply, and the SECURE Act changes are now back in effect.
The SECURE Act, which passed late December 2019, raised the RMDs from 401(k) plans and traditional IRAs from age 70½ to age 72 for those who turned 70½ in 2020.
Then came the pandemic.
In response, Congress passed the CARES Act, which effectively suspended RMDs for 2020 from 401(k)s, 403(b)s, 457 plans, traditional IRAs, SERP-IRAs, Simple IRAs, and Roth IRAs inherited in 2020.
Under the Cares Act, the RMD waiver was for those who reached age 70½ in 2019 and who would be required to take their first RMD by April 1, 2020.
Additionally, the CARES Act also impacted 2019 RMDs for those with a required beginning date of April 1, 2020. Any 2019 RMD amount remaining and not withdrawn by January 1, 2020, was waived.
[Related Read: 10 Ways the SECURE Act Is Changing the Future of Retirement]
2021 RMD Requirement Recap: What You Need to Know
This year, RMDs from 401(k) plans and traditional IRAs must be taken at age 72.
If you turned 70½ after January 1, 2020, you then have until April 1 of the year you reach 72 to take your RMD without penalty.
Failure to take a required minimum distribution triggers a penalty of 50% of the shortfall.
This means, if your RMD is $40,000 and you miss it, you owe a $20,000 penalty in addition to whatever taxes are due on the distribution you take to fix the shortfall.
To avoid this, it’s important to stay on top of RMD changes because more changes are coming.
For January 1, 2022, the IRS released new RMD guidelines, as they expect people to live longer. The changes include smaller minimums.
Last October, a bill was introduced in Congress to raise the RMD starting age to 75. However, nothing has come of this yet.
We regularly post videos with financial information and updates. Check us out on YouTube.
This content was originally published here.