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The best ways to avoid missteps with required withdrawals from retirement accounts

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When it comes to required minimum distributions, there are plenty of ways to make mistakes.

This year, the chore may seem even more confusing than usual. After being waived for 2020, those RMDs — amounts you must take each year from most retirement accounts once you reach a certain age — are again in force for 2021.

“We’re hearing now from advisors about clients who didn’t know they have to take RMDs this year,” said Ed Slott, CPA and founder of Ed Slott and Company. “But the waiver was only for last year.”

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RMDs apply to 401(k) plans — both traditional and the Roth version — and similar workplace plans, as well as most individual retirement accounts. (Roth IRAs have no required withdrawals until after the account owner’s death.)

Prior to a law change that took effect in 2020, RMDs were generally required once a person hit age 70½.

Now, for anyone who reached that age in 2020 (or will reach it later), RMDs kick in at age 72. In other words, if you were born July 1, 1949, or later, you can wait until age 72, Slott said.

Here’s what to watch for.

Who needs to take RMDs

Generally speaking, if you were taking RMDs before 2020 — meaning you had reached age 70½ before then and are subject to the old rules — you should resume those withdrawals this year. (This resumption of withdrawals applies to inherited accounts, as well.)

If you reached age 70½ in 2019 and had intended to take advantage of the April 1, 2020, deadline for taking out the RMD — and did not do it due to the federal waiver — you need to take an RMD this year by Dec. 31. Essentially, your first two RMDs were waived, Slott said.

Meanwhile, if you are subject to the post-2019 rules because you reached age 70½ in 2020 and are now 72, your first RMD should be taken this year. While the law allows you to delay your first one until as late as April 1 of the following year, be aware that doing so would mean you’re on the hook for two RMDs in 2022.

The amount you must withdraw each year is generally determined by dividing the previous year-end balance of each qualifying account by a “life expectancy factor” as defined by the IRS. 

For example, if you’re 75, that number would be 22.9, according to the IRS. Divide your account balance — say it’s $100,000 — by that factor and your RMD would be about $4,366. So if your balance is $500,000, your RMD would be five times that, or roughly $21,830.

However, if you’re working and contributing to a retirement plan sponsored by your employer (and don’t own more than 5% of the company), RMDs do not apply to that particular account until you retire.

If the IRS finds the error first, it’s less likely you’ll get out of the penalty.
Ed Slott
Founder of Ed Slott and Company

If you don’t take your RMDs, you face a 50% penalty. However, Slott said, it often is waived if you find and correct the error yourself.

“If the IRS finds the error first, it’s less likely you’ll get out of the penalty,” Slott said.

Also, be aware that if you took RMDs in 2020 despite the waiver, there’s no special treatment for those withdrawals. 

“Some people took them voluntarily and have asked if they will get credit for that this year,” Slott said. “The answer is no.”

Handling multiple RMDs

It’s important to calculate your RMD for each retirement account that’s subject to the withdrawals. However, in some instances you can take the total of those amounts from one account.

Different rules apply to different types of accounts. For IRAs, you can tally up the total of each RMD and take that amount from just one of your IRAs (or any combination you want). This aggregation applies to traditional IRAs, as well as SEP and SIMPLE IRAs. (Roth IRAs are not subject to RMDs until after the owner’s death.)

Note that inherited IRAs are not included in that aggregation rule. Unless you have multiple IRAs that you inherited from the same decedent, you must take RMDs from each inherited IRA, Slott said.

For 401(k) accounts, RMDs must come from each account that is subject to the withdrawals. However, you can aggregate 403(b) accounts, Slott said.

Additionally, married couples must view their accounts and RMDs separately from each other. In other words, while each person can aggregate the RMD amount among their own accounts as permitted, they cannot combine those amounts with their partner’s and then take RMDs from just one spouse’s account.

Also, while you can delay RMDs from a 401(k) if you’re working for the company sponsoring it, you still must take those distributions from other 401(k) accounts you have (as well as any other qualifying accounts).

For inherited IRAs, 401(k) plans or other qualified retirement accounts, the balance must be entirely withdrawn within 10 years if the owner died after 2019, unless the beneficiary is the spouse or other qualifying individual. The 2019 Secure Act eliminated the ability of many beneficiaries to stretch out distributions across their own lifetime if the original account owner died on Jan. 1, 2020, or later.

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