Posted by Elliot Kravitz, ATP

New Required Minimum Distribution Rules For 2020 Retirement Account

New Required Minimum Distribution Rules For 2020 Retirement Account

Saving for retirement is mandatory, and there are some retirement accounts in which users enjoy tax breaks for having money in their retirement account. Examples are 401(k)s, IRAs, and other designated retirement account. With these accounts, you will get immediate and future tax benefits, which could save you hundreds of dollars.

In a bid to stop people from keeping money forever in their retirement account, there came rules for required minimum distribution targeted at retirement savings. There are, however, changes for the RMD; hence, it makes sense to update yourself on these changes to guard against consequences.

What is the required minimum distribution?

With this law, retirement savers must take some money (minimum distributions) from some retirement account when they get to a certain age. This applies to folks with 401(k)s, traditional IRAs, or other types of retirement account. This RMD law also applies to some inherited retirement accounts.

The essence of the RMD is to reduce the limit people can benefit from their retirement accounts. Since common retirement accounts like 401(k)s, traditional IRAs, and other types come with tax saving. There is also the option for tax-deferred treatment of gains and income arising from the retirement account.

RMD came to check the excesses of people that might want to have their retirement savings in their account forever, thereby escaping taxes. With RMD rules, there are time limits on the duration of these savings. This ensures that Uncle Sam gets her share of the tax.

When do I have to start taking RMDs?

The time to take RMD is a factor of your situation. An original account owner, for instance, will have to take their withdrawal on turning 72 years. If you will be 72 in a particular year, there is grace till Apr 1 of the given year to take the RMD. Following this one-time extension, there should be withdrawal in subsequent years, which should be over in that year.  

This is one of the changes to RMD rules since the age was previously 70 ½ before the law came up in 2019. Different rules guide all heirs to IRAs (401(k)s, traditional IRAs, or other types). Spouses can roll over inherited accounts to their IRA in their name. For others, there is a limitation to chose to take a massive sum at once or withdraw the entire money within ten years. This is a rule with immediate effect.

This rule is the second new change to RMD and is applied for people that are heirs to retirement accounts in 2020. For heirs to 2019 or earlier, there are other rules which allow them to withdraw over their lifetime. This option, however, involves getting the RMD value every year to make sure you pay the correct tax.  

What should be the Value of my RMD?

Many people find it challenging to comply with the rules of RMD because getting the exact amount of RMD is hard. This is because the IRS wants you to withdraw your investment before you die. This, for many people, has to do with the life expectancy to help taxpayers determine the correct RMD for each year.

On having all the essential information, calculating RMD is a simple process. The following procedure will guide you:

    •    Sum up all the retirement account values subject to RMD as of Dec 32, the previous year.

    •    Get the right distribution factor from the IRS life expectant table.

    •    Divide the retirement account balance distribution factor. This is what you need to withdraw each year. 

Typical RMD table for retirement account holders

Age and Distribution Factor

The implication of this is that if you are 80 years old, IRS predicts that you will live another 18.7 years based on their life expectancy table. Hence to everyone that turned 80 in 2020, they will take their account balance on Dec 31, 2019, and divide it by 18.7 to get the RMD. This is the value of what you will withdraw. For the following year, you will take the balance as of Dec 31, 2020, and use the factor of 81, which is 17.9. Divide it, and you will get your RMD for 2021.

Elliot Kravitz, ATP
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