When it comes to required minimum distributions, it is important to understand the rules to avoid any missteps with the Internal Revenue Service.
Generally, the IRS requires individuals, once they reach age 72, to withdraw required minimum distributions each year. RMDs can be taken from traditional IRAs or employer-sponsored retirement accounts.
Although RMDs do come with specific rules, the process is slightly different in 2020. That means, it conceivably is more beneficial than ever before to have an RMD strategy.
How and When to Withdraw
If you are concerned that you will forget to take out your RMDs, one way to prevent that is setting up automatic withdrawals. Individuals can otherwise opt to take one-time distributions each year.
Distributions can be taken in different forms, including a check sent to the individual. Another option is a direct transfer to your bank, brokerage or cash management account. It is at the individual’s discretion whether they receive the distributions monthly, annually, or by following another set timeline that meets the mandated deadline.
The deadline to withdraw your first RMD is typically April 1 on the year after you turn 72. For each subsequent year, the deadline to withdraw is Dec. 31. However, the IRS’ requirement to withdraw RMDs was waived for 2020.
Avoiding Possible Penalties
While it is important to meet the RMD deadlines, it is also crucial to take the full required amount. If you withdraw less, the IRS penalty is 50% of the amount not taken by the deadline.
Similarly, be mindful if you choose to withhold taxes from your RMDs. Underwithholding may result in a tax penalty. It is also recommended that individuals allocate funds to pay the taxes.
Navigating 2020 Changes and Beyond
Due to the coronavirus pandemic, individuals are permitted to skip the 2020 RMDs via the Coronavirus Aid, Relief, and Economic Security Act. Delaying withdrawals from retirement accounts until 2021 still requires careful planning and consideration.
There are benefits for retirees waiting until 2021 to take their next RMD. By waiting until next year, retirees can avoid withdrawing money at a lower value. If a retiree does not need the money this year, waiting a year will give the stock market, as well as any personal investments, a chance to restabilize and regain some of its previous value.
Delaying withdrawals until 2021 does require retirees to take additional actions. If you plan to skip 2020’s RMD, make sure that you cancel your pre-set automated withdrawal. Doing so ensures that you are not sent the funds. The CARES Act only lets you skip 2020 – it does not automatically cease payments. Once the period of withdrawal ends, then retirees can set up new withdrawals for 2021 and future years.
Looking ahead, retirees can continue thinking about how they want to utilize their RMDs. Options can range from utilizing funds toward living expenses, future investments, wealth transfer, or charitable donations. Regardless of how one chooses to use RMDs, discussing these options with a financial or tax advisor is recommended.