What Are Required Minimum Distributions (RMDs)?

You may have heard people refer to required minimum distributions (RMDs) and wondered what that means. RMDs are related to your retirement savings, and you should understand RMD rules to ensure you meet government requirements. The guidelines for RMDs can change from year to year, so make sure you look for the latest updates.

What Are RMDs?

Required minimum distributions refer to the money you have to take from a range of retirement plans, including:

• Traditional individual retirement accounts (IRAs).
• Simplified employee pension plans.
• Employer-sponsored retirement plans.

Owners and retirement plan participants who reach a certain age must take RMDs to avoid paying tax penalties. You can also withdraw more than the minimum requirement. People who have more than one account will need to take RMDs for each one.

RMDs ensure people don’t use retirement accounts as a long-term tax shelter, which is saving money while avoiding paying taxes on it. In late 2019, a new law changed the rules governing RMDs, adjusting the age requirements.

What Are RMDs for 2021?

The new law adjusted the RMD age for 2020 and from now on. As of 2021, you have to start taking money from the retirement account by April 1 after you turn 72. For example, if you turned 72 on January 1, 2021, you must withdraw by April 1, 2021. If you turned 72 on April 20, 2020, then you have the same deadline. Before 2020, the old RMD age was 70.5 years, 1.5 years earlier than the current deadline.

If you don’t take your RMD, you could be subject to a penalty. The IRS will charge a 50% tax on what you should have withdrawn, on top of your standard income tax. The IRS institutes stiff penalties to encourage people to follow the rules.

You can find some exceptions to the rule. For instance, if you continue to work after you turn 72, you don’t have to take a distribution from your work 401(k). However, you’ll need to take distributions from an old retirement plan or your own IRA.

Learn More About RMDs With Fort Pitt Capital Group

If you aren’t sure how much your RMD will be, you can use this worksheet from the Internal Revenue Service to determine the minimum you must take out of your account.

At Fort Pitt Capital Group, we can also aid you with your questions related to RMDs. In addition, we’ll assist with all your investment and other personal finance needs. Learn more about our individual services and make an appointment with us today.