What Should Financial Professionals Know About Required Minimum Distributions Before Year-End?

Linda Migliazzo |

The SECURE Act made some lasting changes to how required minimum distributions (RMDs) from retirement accounts work. There is a 50% penalty on any RMDs not withdrawn on time. Because of the changes, investors and financial professionals need to be fully aware of the rules surrounding RMDs.1

Though RMDs may seem like a hassle—and potentially raise your income tax rate—there are ways to handle them to manage your retirement funds. Here is an overview of the RMD rules and regulations for 2021.

What accounts are subject to RMDs?

RMDs apply to the following accounts:

· Traditional 401(k)s

· 457 and 403(b)s

· Traditional IRAs

· Inherited IRAs

One exception to the RMD is the Roth individual retirement account. Roth withdrawals are tax-free after you pass retirement age, so there is no minimum amount you are required to withdraw each year, as any Roth withdrawals do not change your overall taxable income.

When must RMDs be taken?

Until a few years ago, RMDs began at age 70.5—but in 2021, they do not start until age 72.

If a client turns 72 during 2021, their first RMD is before April 1, 2022. But the client's next RMD is by Dec. 31, 2022, so waiting until April 2022 to take one's first RMD, rather than taking it before the end of 2021, may significantly increase the client's taxable income for the 2022 tax year.

If any of your clients are turning 72 this year, it may be worthwhile to schedule a meeting before year-end to get an estimate of their 2021 and 2022 income and determine the most tax-efficient time to take the 2021 RMD.

What may be possible with RMDs?

Some clients do not need their RMDs to cover regular expenses. In these situations, there are a couple of things they may do with RMD funds to continue their growth or manage any taxes assessed.

· Reinvest any RMDs in a taxable investment account.

· Gift up to $100,000 to a qualified charity, which may exclude the gifted amount from the client's taxable income.

One advantage of placing RMDs in a taxable account is that, when this account passes to the client's beneficiaries, it is no longer subject to RMDs in the way an inherited individual retirement account or 401(k) might be.


Important Disclosures:

This material was created for educational and informational purposes only.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. 1 https://investornews.vanguard/rmds-are-back-for-2021-what-you-need-to-know/

This article was prepared by WriterAccess.

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