2021 RMD Update

Update: No Waiver for 2021 RMDs

Despite speculation that the ability to waive 2020 RMDs might be extended to apply to 2021 RMDs, the latest Covid-19 Economic Relief Bill signed into law on December 27, 2020, did not contain any provisions extending the relief to 2021.

2021 RMDs will therefore be required to be made in the normal way. There was also no specific mention of an RMD waiver for 2021 in the Biden tax proposals. We will continue to monitor the situation as the Biden tax proposals are developed and work their way through Congress. Please bookmark BakerAvenue’s Blog to view additional RMD updates.

Required Minimum Distributions 2020 Tax Treatment

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act waived all required minimum distributions (RMDs) in 2020 for most qualified retirement plans i.e. IRA accounts, including SEP and SIMPLE IRAs, defined contribution plan accounts such as those under 403(a), 403(b), 401(a), and 401(k), and RMDs from 457(b) plans (government employers only).

Bear in mind however that this relief does NOT exempt 2020 RMD distributions from being taxed - it rather removes the requirement to take an RMD for 2020 – So if you go ahead and take a 2020 distribution from your plan, even though you are now not required to do so, you will certainly pay tax on it in the same way as any other year.

The easiest way to keep a 2020 RMD off your 2020 tax return is to have your Custodian (Fidelity/TD Ameritrade etc.) not make the payment in the first place. If they have not already been in contact with you then contact them and direct them to waive the 2020 RMD. If your Custodian has already contacted you about your 2020 RMD, then engage with them to have the 2020 distribution waived.

What if you need to take a 2020 distribution to meet your living expenses?

If you can afford not to draw on the funds that you normally receive in the form of RMDs then best not to take them – in a normal year the IRS forces you to take RMDs for a reason – they are taxed as ordinary income at your marginal rate and, as such, represent a very inefficient way (for you) to take income.

Because of the tax-inefficiency of RMDs, you would be better off waiving the 2020 distribution and using “rainy day” money, or that cash buffer, instead of taking a distribution that you don’t have to take and that will be subject to full income tax rates. Using your own cash, has no tax consequences for you and might help to keep that distribution off your 2020 tax return. You might also consider taking only a portion of your normal distribution if you cannot afford to forgo it completely. Your Custodian can again adjust your 2020 distribution. You can also request that they pay your 2021 RMD as early as possible in 2021 so as to put you in funds as soon as possible without creating 2020 taxable income and tax liability.

What if you have already taken a 2020 RMD?

2020 RMDs were available to roll-back via a special concession granted by the IRS up until August 31, 2020.

RMDs taken after August 31, 2020, can still be rolled back (via the 60-day rollover mechanism) into the original account. These rollovers are subject to the normal 60-day time limit to qualify and to the “one rollover” per 12-month restriction.

It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.