Required minimum distributions are back. Do they apply to you?

By Sabrina Karl

One of Congress’ myriad stimulus measures of 2020 was suspending required minimum distributions for retirement accounts. But that free pass ended with the calendar year, and required minimum distributions, or RMDs, are back for 2021.

An RMD is the federal government’s way of putting some limit on how much tax savings you can get from tax-advantaged retirement accounts. Still, the tax most retirees will pay on RMDs is significantly outweighed by many years’ worth of tax advantages earned before RMDs are triggered. In a way, RMDs are like finally having to eat some vegetables after years of enjoying dessert.

RMDs are required on 401(k), 403(b), traditional IRA, SEP IRA, SIMPLE IRA, and Roth 401(k) accounts. They do not apply to Roth IRAs, as those can only be funded with money that’s already been taxed.

The year you must start taking RMDs is the year you turn 72, and how much you’re required to take out depends on your age, standard life expectancies, and your account’s value at the end of last year. Your brokerage or financial advisor can tell you the correct amount.

Of course, you’re free to withdraw more than the RMD amount. But beware that what you withdraw is taxed like ordinary income, so retirees tend to withdraw only as much as they need for the year to minimize the tax hit.

So what’s changed? Last year’s CARES Act suspended the RMD requirement, but just for 2020. That means anyone 72 or older last year could have skipped their 2020 RMD. But the rules are back in normal force this year.

That means you’ll need to withdraw the minimum amount from all of your RMD-required accounts by December 31 this year, or by April 1 next year if this is your first year of RMD status.