Recent Changes To Retirement Plans

Update: Tax Filing Deadline
Now May 17, 2021

There have been recent changes to the rules for
required minimum distributions (RMDs) from retirement accounts.

A retirement plan account owner must normally begin taking an RMD annually starting the year he or she reaches 70½ or 72, depending on their birthdate and maybe the year they retire. Retirement plans requiring RMDs include traditional, Simplified Employee Pension Plan (SEP), and Savings Incentive Match Plan for Employees (SIMPLE) Individual Retirement Accounts; 401(k), 403(b), 457(b), profit-sharing, and other defined contribution plans.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the age when individuals must begin taking withdrawals from their retirement accounts. Previously, someone born on or before June 30, 1949, was required to start getting RMDs for the year they reached the age of 70½. However, under the SECURE Act, if a person’s 70th birthday is July 1, 2019, or later, they do not have to take their first RMD until the year they reach age 72.

The Coronavirus, Aid, Relief and Economic Security (CARES) Act waived RMDs during 2020 so seniors and retirees, including beneficiaries with inherited accounts, were not required to take money out of IRAs and workplace retirement plans. The waiver included RMDs for individuals who turned age 70½ in 2019 and took their first RMD in 2020.

Individuals who reached age 70½ before 2020 and were still employed but terminated employment in 2020 would normally have a 2020 RMD due by April 1, 2021, from their workplace retirement plan. This RMD is also waived as part of the CARES Act relief. Roth IRAs do not require withdrawals until after the death of the owner.

2021 RMDs

Individuals who reached 70½ in 2019 or earlier did not have an RMD due for 2020. For 2021, they will have an RMD due by December 31, 2021. Individuals who did not reach age 70½ in 2019 but will reach age 72 in 2021 will have their first RMD due by April 1, 2022, and their second RMD due by December 31, 2022.

To avoid having both amounts included in income for the same year, make the first withdrawal by December 31, 2021, instead of waiting until April 1, 2022. After the first year, all RMDs must be made by December 31.

An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Calculating the amount of the RMD depends on the type of IRA or if they are from multiple accounts. Not taking a required distribution or not withdrawing enough could mean a 50% excise tax on the amount not distributed.

Some Can Delay RMDs

Though the April 1 deadline for taking the first RMD is mandatory for all owners of traditional IRAs, participants in workplace retirement plans who are still working usually can, if their plan allows, wait until April 1 of the year after they retire to start receiving distributions from these plans. Individuals who reached age 70½ before 2020 and were still employed but terminated employment in 2020 would normally have a 2020 RMD due by April 1, 2021, from their workplace retirement plan. This RMD is also waived as part of the CARES Act relief.

Employees of public schools and certain tax-exempt organizations should check with their employer, plan administrator, or provider to see how to treat these accruals.

Coronavirus-Related Distributions and Loans

The CARES Act made it easier to access savings in IRAs and workplace retirement plans for those affected by the COVID-19 pandemic. This relief provided favorable tax treatment for certain withdrawals from retirement plans and IRAs including expanded loan options.

Distributions

Certain distributions made from January 1, 2020, through December 30, 2020, from IRAs or workplace retirement plans to qualified individuals may be treated as coronavirus-related distributions. These distributions are not subject to the 10% additional tax on early distributions (including the 25% additional tax on certain SIMPLE IRA distributions).

Coronavirus-related distributions may be repaid to an IRA or workplace retirement plan within three years.

If you had an outstanding loan balance when you left employment, the plan sponsor will usually offset the loan balance against your benefit.

For loan offsets in 2020, you have until the due date of your tax return (plus extensions) to repay that amount to another retirement plan or IRA.

If you’re a qualified individual, you can treat the loan offset as a coronavirus-related distribution and have three years to repay to an IRA or include in income tax over three years.

RMDs

An IRA owner or beneficiary who received an RMD in 2020 had the option of returning it to their account or another qualified plan to avoid paying taxes on that distribution. RMDs in 2020 that were not rolled over or repaid may be eligible to be treated as coronavirus-related distributions if the individual is a qualified individual. A 2020 RMD that otherwise qualifies as a coronavirus-related distribution may be repaid over a 3-year period or have the taxes due on the distribution spread over three years.

A withdrawal from an inherited IRA to a qualified individual may also be a coronavirus-related distribution. Income from the withdrawal may be spread over three years for income inclusion; however, the withdrawal may not be repaid to the inherited IRA.

The one rollover per 12-month period limitation and the restriction on rollovers to inherited IRAs did not apply to repayments made by August 31, 2020. The RMD suspension did not apply to qualified defined benefit plans.

The CARES Act included special rules for plan loans made to qualified individuals. Plans could suspend loan repayments for up to one year, although repayments typically resumed in January 2021. This effectively gives up to six years (instead of five) to repay a typical plan loan.

A Final Note

Contact your employer, plan administrator, plan provider, or tax professional if you have questions about how these recent changes affect your retirement plan.

Stay safe. Stay well. Stay home.