CARES Act RMD Vacation Is Over; What’s The Best Withdrawal Strategy For 2021?

By Julie Jason, originally posted on Forbes.com:

Did you take a break from required minimum distributions (RMDs) in 2020?

Thanks to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which suspended RMDs for 2020, you did not have to take RMDs from your traditional IRAs (individual retirement accounts) and other tax-deferred accounts last year. (Roth IRAs do not require RMDs during the IRA owner’s lifetime.)

RMDs Have Returned

But now it is 2021, and the RMD “vacation” is over. You need to make sure you have a plan in place for your 2021 RMDs, especially if you are turning 72 in 2021 and are new to RMDs.

Before making any RMD decisions, always, always, always be sure to speak with your accountant or tax adviser.

The Importance of 1949

Those who were born in the first half of 1949 (Jan. 1 through June 30) turned 70 1/2 in 2019 and became subject to RMD rules then. If you skipped your 2020 RMD, no problem. But, you cannot skip 2021. The CARES Act RMD suspension was good for only one year, 2020.

Those born in the second half of 1949 (July 1 through Dec. 31) came under the SECURE Act’s new age 72 rule. Because they turn 72 in the year 2021, they will need to take a 2021 RMD. The SECURE (Setting Every Community Up for Retirement Enhancement) Act was passed in 2019.

A special rule comes into play for anyone taking his or her very first RMD, in this case, those born in the last half of 1949. They have the option of taking two RMDs in 2022 instead of one in 2021 and another in 2022. With their first RMD, they can take it (based on Dec. 31, 2020 values) by Dec. 31, 2021, or they can delay that RMD to the first quarter of 2022 (it has to be taken by April 1, 2022).

However, if they opt for the delay, they will be taking two RMDs in 2022: their 2021 RMD (based on Dec. 31, 2020 values) and their 2022 RMD (based on Dec. 31, 2021 values). Since both withdrawals will take place in 2022, both RMDs will be taxable income for the 2022 tax year. On the other hand, if the 2021 RMD is taken in 2021, the RMD will fall into the 2021 tax year.

Again, don’t try this alone. Consult with your accountant before making any RMD decisions.

Total Versus Monthly?

Should you take your RMD in one lump sum or a little at a time? Reader E.H. asked: “Is there any negative to getting the total RMD in January versus monthly over the course of the year? We don’t ‘need’ the money at any particular time.”

Some tax advisers believe it’s better to take the RMD toward the end of the year to squeeze out as much growth as can be achieved within the tax-deferred environment of an IRA. That works in upwardly moving markets. It also increases the potential for a hefty 50% IRS penalty if the RMD isn’t fully withdrawn during the calendar year.

If the cash is needed for living expenses, it makes sense to take the RMD in monthly chunks. Or, as in E.H.’s case, where the RMD is not used for living expenses, go for a lump-sum RMD later in the year, perhaps in early fall, to avoid a last-minute rush.

So, it comes down to this: The decision is a matter of personal preference.

RMD Resources

When researching RMDs, the official guide is IRS Pub. 590-B, “Distributions from Individual Retirement Arrangements (IRAs).” Here are additional IRS resources for RMDs and IRAs.

Other Questions?

If you have RMD questions, send them to me at forbes@juliejason.com.

To read Julie Jason's books, go to: https://juliejason.com/books/julies-books.