Blog by BR Accounting and Tax Service

Looks like Required Minimum Distributions are back in play — but different

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I hope you have managed to stay safe and well! We focus on resolving tax issues in Prince William County and throughout the lower Northern Virginia area.

The one-year suspension of required minimum distributions (RMDs) from certain retirement plans authorized under the CARES Act is over. Meaning persons that are age 72 and older will need to resume taking RMDs this year.

A refresher regarding RMDs: The amount is based on the age of the account holder. For example, a 72-year-old with a $100,000 IRA would normally have been required to withdraw $3,906 last year. The RMD for a 75-year-old this year is $4,367.

Thinking you have a Roth-401k, so you’re off the hook. You are subject to the same RMD rules that traditional 401(k) and IRA holders are, except your distributions are not taxed.

There is an exception for those that continue working after the age of 72 (as long as you don’t own 5% of the company sponsoring the plan). You can avoid taking the minimum distributions entirely by rolling a Roth 401(k) into a personal Roth IRA, which is not subject to RMD rules.

A major concern with RMDs is the RMD is calculated based on the closing balance of the account at the end of the previous year. When the markets drop significantly, the RMD represents a much higher percentage of a diminished portfolio, thus reducing the ability to recoup big losses. In case you’re wondering, the tax penalty imposed, if you don’t take your RMDs is a prohibitive 50% of the required distribution amount.

Along with the CARES Act suspension of RMDs last year, the IRS also extended the 60-day rollover period for people who took an RMD prior to the passage of the legislation to Aug. 31. If you missed that deadline, you may still be able to deem the withdrawal a Covid 19-related distribution.

This year, you may want to defer your RMD until the end of the year because of possible additional rule changes. It’s a better than an even bet that there will be more legislation this year and RMDs could possibly be affected. Stay tuned for more info.