Changes for RMDs and Other Takeaways

If you’re anything like me, it’s a busy time right now; “busy” in all senses of the word. There’s a lot to think about and much to do as we work to get back to life pre-Covid. It’s understandable if investing topics may not be at the top of your list. Assuming this to be the case, here’s a brief rundown of some of the important updates at this point in 2021 for folks currently drawing from their retirement accounts.

Two recent Acts passed by Congress made important changes for those 70 ½ and older. For years this had been the age when Required Minimum Distributions (RMD) needed to start being withdrawn from tax-deferred retirement accounts like 401(k)s and IRAs. These distributions remain based on average life expectancy and the money is taxed as income in the year withdrawn.

The SECURE Act passed a couple of years ago changed this beginning age to 72. Then last year Congress passed the CARES Act that, in part, allowed savers to skip taking their RMDs in 2020 if they wanted to. The idea was to not require investors to tap their portfolios when their investments may have been losing money during the market’s response to the pandemic. In practice, however, most retired folks of RMD age had to take distributions because they needed the money. But deferring an RMD presented an opportunity for others to save on taxes and let their savings continue to work in the markets.

That has changed for 2021. The starting age for RMDs is still 72 but there’s no deferral, so you must take your RMD this year. It’s early days yet, of course, and this could change with new legislation, but it’s unlikely. Stocks and bonds are up handily since the CARES Act was passed last March, so the original intent behind RMD deferral isn’t an issue. At least not currently.

Just in case, however, you can delay taking your RMD until later this year if you can afford to do so. This can help avoid potential headaches associated with trying to return your RMD should the rules change again. As a reminder, the IRS doesn’t necessarily care when you take your RMD so long as it’s done by the end of the calendar year. For example, if you’re turning 72 in June, you could take your distribution at any time between now and 12/31, even a little every day if you really wanted to. The point is that your distributions within the year add up to at least your required minimum.

Another possibility for 2021 is an increase of the RMD starting age to 75. Bipartisan legislation was working its way through the last Congress that would revamp the retirement planning landscape yet again. Some are speculating that it could be brought to the forefront or be folded into broader legislation soon. It’s also possible that anything passed this year would start next year. I’ll be watching closely to see what happens along these lines, but it’s another reason to wait on taking your 2021 RMD if you can afford to.

Also confusing is a decoupling of the Qualified Charitable Distribution (QCD) rules from the RMD rules. This provision allowed savers to give some or all their RMD (up to $100,000 per year) directly to charity. Like RMDs, QCD eligibility began at age 70 ½ but wasn’t changed to 72 along with RMDs. In other words, you may be 71 and not required to take an RMD, but you can still make a QCD. Confusing, right? So, with two different age numbers to remember, some folks skipped making charitable donations from their IRA in 2020 when many charities desperately needed the support.

The last update is for folks of RMD age who are still working. They had previously been barred from contributing to Traditional IRAs but could contribute to a Roth once they crossed the 70 ½ age threshold. Fortunately, the age provision has been repealed, so contributions can be made so long as there’s sufficient income to do so. This change helps those still working at building their nest egg. It also helps those who, rightfully so I think, felt frustrated at losing their ability to save in a tax-deferred way just because they reached a particular age.

So, here are three takeaways for RMD-age savers in 2021:

• Consider waiting to take your RMD until later in the year if you can afford to. This allows time to clear up any potential legislative ambiguities.
• Also if you can afford it, consider donating some or all your RMD directly to charity. They likely need the money and it’s simple to do.  
• If you’re still working and over age 70 ½, try to fund your IRA and perhaps your spouse’s as well. It could be $7,000 each (those age 49 and younger are limited to $6,000 each). Or if you’re working and have access to a 401(k), consider saving even more there.

Have questions? Ask me. I can help.