As the year flies by I have noticed more and more questions of uncertainty revolving around one particular subject, Required Minimum Distributions or RMDs. More specifically the question is, “Are RMDs required for 2021?” I believe the reason this has become a topic of uncertainty is due to the fact that for 2020 RMDs were not required. This relief was one of the many items included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act was passed into law in March 2020.
Before I answer the question of topic, let us refresh our memory on the basics of RMDs. RMDs were established by the U.S. Tax Law as a means to collect taxes on tax-deferred retirement accounts. Like most of the tax code there are various exceptions and specific circumstances that convolute the RMD rules. For the sake of simplicity, RMDs establish a set dollar amount that a person 72 or older is required to withdraw annually from their tax-deferred retirement account. This amount is determined by taking the prior year-end balance of the tax-deferred retirement account and dividing it by a Life Expectancy Factor that can be found using the IRS Uniform Lifetime Table located in IRS Publication 590.
Without RMDs in the tax law, these funds could, in theory, remain in tax-deferred accounts growing annually and delaying taxation for generations. As a means to make sure this did not happen and allow the IRS to collect taxes in a timely fashion on these funds, RMDs were established.
Now, back to the question at hand and to settle any uncertainty on 2021 RMDs. For the 2021 tax year, there has been no relief issued and RMDs ARE REQUIRED to be distributed by 12/31/2021.
There are a few points to be made regarding RMDs that I would like to note. First, RMDs must be taken directly by the account owner and be included in the account owner’s 2021 Adjusted Gross Income. Alternatively, if certain criteria is met, the RMD of up to $100,000 may be paid directly to a qualified charity of your choosing. If paid directly to a charity, this is considered a Qualified Charitable Distribution (QCD). With QCDs the amount distributed directly to the charity will not be includable in your Adjusted Gross Income and will still satisfy the annual RMD requirement.
Hopefully, the requirement of RMDs for 2021 is of no surprise to you but if it is, there is still time to act. Begin discussions with your CERTIFIED FINANCIAL PLANNER™ professional and Certified Public Accountant to properly plan for both the timing of the distribution and an appropriate strategy for payment of any associated tax that may be generated
Published in the Victoria Advocate
Christopher Laughhunn CPA/CFP® is the Tax & Accounting Principal for Keller & Associates CPAs, PLLC and an Associate Advisor for KMH Wealth Management, LLC.