Whether you’re preparing for retirement or already enjoying it, one thing remains true – you want to make the most of your income from your retirement accounts and protect yourself from unnecessary IRS penalties. But required minimum distribution (RMD) rules change from time to time, and both RMDs and withdrawal strategies can have tax consequences.
In late 2019, as a result of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the RMD age increased from 70½ to 72.
In 2020, RMDs from traditional IRAs, inherited IRAs, and employer-sponsored plans were temporarily waived by the Coronavirus Aid, Relief and Economic Security (CARES) Act.
Here’s What You Need to Know About Your IRA RMD for 2021
- Once you reach age 72 (70½ if you turned 70½ before Jan 1, 2020), you are required to take annual RMDs from your IRAs.
- If you turn 72 in 2021 and will be taking your first RMD, you have until April 1, 2022 to do so, but for each subsequent year, your RMD must be taken by December 31.
- Keep in mind: if you delay your initial RMD until April 1, you’ll be responsible for two withdrawals in 2022 (one by April 1 and one by December 31), which could result in a larger tax liability.
- If you fail to take your RMD on time and in the right amount, there can be a penalty. For every dollar not withdrawn, the Internal Revenue Service (IRS) will charge a 50 percent penalty (known as the excise tax).
- Here’s a tip: donating all or part of your RMD directly to a qualified charity, like Drexel University or Drexel University College of Medicine, can satisfy your annual requirement. While your gift can’t be claimed as a charitable deduction, it will lower your income tax liability for the year, regardless of whether you itemize or not.
How Are RMDs Calculated?
RMD amounts are determined by looking at the following factors:
- Your age as of December 31 of the current year and your corresponding life expectancy factor (according to the IRS Uniform Lifetime Table, or Joint Life and Last Survivor Table, if your spouse is your sole beneficiary and more than 10 years younger than you).
- Your IRA balance as of December 31 of the previous year (which should be adjusted to include any outstanding rollovers or asset transfers that weren’t in the account at year-end).
The RMD for each year is calculated by dividing the IRA account balance as of December 31 of the prior year by the applicable distribution period or life expectancy.
Here’s an example:
- You are age 75 (as of December 31, 2021)
- Your life expectancy factor is 22.9 years
- The value of your IRA (as of December 31, 2020) is $800,000
- Your RMD would be $34,934.50 ($800,000/22.9)
Changes Are Coming for 2022
For 2022, the IRS has updated all three life expectancy tables affecting RMD calculations, extending life expectancy and allowing RMDs to be drawn out over a greater length of time. This means that you will be able to keep more money in your retirement accounts over time and pay taxes on those funds at a slower pace. You’ll have the flexibility to withdraw more if you need to, but if you don’t, you’ll reap the benefit of having a larger account balance with the potential for continued growth.
Here’s a tip: Taking the correct RMDs is an important part of keeping your retirement finances healthy. The IRS provides important taxpayer information about RMDs, including FAQs, a chart that highlights some of the basic RMD rules as applied to IRAs and defined contribution plans, as well as resources to help you accurately compute your annual RMDs.
Questions? Contact David Toll, JD, senior associate vice president, Drexel University Office of Gift Planning at 215.895.1882 or giftplanning@drexel.edu.