How the law has changed retirement distributions
Because of changes in the law governing retirement accounts, it is important for people in their 70s to understand the latest regulations regarding required minimum distributions (RMDs).
If you turn 72 this year, you have an RMD due in 2021. The deadline is based on your birth date. The SECURE Act of 2019 delayed the age threshold for RMDs from 70 to 72 for those who turned 70 in 2020 or later. If you were born after June 30, 1949, you are subject to the regulations associated with the SECURE Act. If you were born June 30, 1949 or before, you are subject to the pre-SECURE Act 70 RMD regulations.
The CARES Act, passed in 2020, waived all RMDs for 2020 regardless of your age. There is a difference between your first distribution year and the year in which you must take your distribution. They may not be the same. For example, if you turned 72 on July 15 of this year — that is, you were born after June 30, 1949 — then 2021 is your first distribution year. However, you are not required to take your first distribution until the required beginning date (RBD), which is April 1 of the year following the year you turned 72. So, in this case, you can postpone taking your first RMD until April 1, 2022, which is your RBD. But if decide to use this alternative, you will be required to take 2 RMDs in 2022.
To consider another example, if you were born on June 15, 1949, you would have been subject to the pre-SECURE Act regulations. Your RBD normally would have been April 1, 2020. However, because of the CARES Act, you were not required to take an RMD in 2020. Nonetheless, you are required to take an RMD by the end of 2021. This RMD is based on the value of your retirement account value at the end of 2020.
If you are contributing to a 401(k) and are still working, even if have reached age 72, you can delay your RMDs until the year you retire, if your plan allows it.
After June 30, all IRA owners will be subject to the SECURE Act regulations, and the transition to age 72 will be complete. However, Congress is considering raising the RMD age to 73 in 2022 under new pending legislation. There is also the possibility that Congress will increase the age to higher levels. If this happens, you would be faced with new transition requirements.
Naturally, when you have endof-year RMD requirements, you do not have to wait until the end of the year to make withdrawals. There is always the chance that the stock/bond prices may be lower at year-end than the price levels during the year.
So, you may want to gradually take distributions throughout the year so that you are not faced with having to make a large distribution at an inopportune time at year-end.
Another issue is related to the amount of withholding of federal taxes on your RMD. You have the option to withhold no taxes or a significant amount. Generally, your IRA trustee requires a minimum of 10%, if you choose to withhold taxes. Naturally, if you expect to owe federal taxes in the next year, you should consider withholding some taxes from your RMD.
On the other hand, if you expect a large refund and would prefer investing the excess funds yourself rather than providing them to the IRS, then you should either minimize your federal tax withholding or simply request no federal tax withholding.