RMD's in 2020 Fast Facts
Date: August 14th, 2020

RMD's in 2020 Fast Facts

What is the RMD for 2020? First, let's take a look at what RMD's are. Plenty of pre-retirees and retirees in Sun City, AZ, and beyond may be unaware that they are not allowed to keep retirement money in an account beyond a specific length of time.  Withdrawals are to be taken out of retirement plan accounts including IRAs, SEP IRAs, SIMPLE IRAs, and other accounts at the age of 72.  

Some alterations to the rules pertaining to these withdrawals were implemented in December of 2019 through the Secure Act.  Those with a birthday of July ’19 or later are not required to withdraw money from the aforementioned retirement accounts until age 72 as opposed to the previous age of 70.5.  


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Furthermore, most people are quite surprised to learn withdrawals from ROTH IRAs are not required until after the account owner’s death.  Let’s take a closer look at RMDs:


Dissecting RMDs

RMD is an acronym used in the financial industry that stands for required minimum distribution.  The RMD is the least amount of money that must be withdrawn from a retirement account on a yearly basis.  There is no penalty for withdrawing more than the minimum amount required. 

The purpose of RMDs is to ensure the IRS is provided with tax dollars.  If RMDs did not exist, it would be possible for some retirees to survive off other income/savings and simply avoid taxes on retirement accounts, preserving the money for family members.

Withdrawals are included within the individual’s taxable income but for the portion taxed prior to placement in the account or that which is obtained without taxes.  As an example, designated Roth qualified distributions are received without taxes.

The rules pertaining to RMDs are dynamic, meaning they change as time progresses.  At the current moment, those who fail to take an RMD from their own IRA or one that is inherited by the designated deadline are to be subjected to a 50% penalty from the IRS.  

Furthermore, plenty of people assume RMDs must be made by the age of 70.5.  However, this rule changed in 2020.  Withdrawals of a minimum amount of money from qualified accounts are to occur at age 72.


RMD Penalties

The failure to comply with RMD rules triggers consequences.  If the distributions are too small or if no distributions are taken, the penalty is likely to be a 50 percent excise tax.  This tax is applicable to the amount of money that is not distributed as mandated by RMD rules.  In such an instance, Form 5329 will likely need to be filed.


RMD After the Account Owner Passes Away

If someone in your family passes away, the RMD that would have been withdrawn for the year of his or her death should be used.  Family members who are considered designated beneficiaries of those who passed away prior to January 1 of 2020 should reference the Single Life Table as detailed in Publication 590-B when calculating RMDs.  

This table details the factor for life expectancy in accordance with the age of the beneficiary.  The balance of the account in question is divided by the beneficiary’s life expectancy to gauge the initial RMD.  

A distribution stemming from a qualified retirement plan contains a plan document that sets the rules for RMD.  The beneficiary can review his or her options with the plan administrator.  In some instances, the RMD payout timeline is as short as half a decade.  In other instances, the payout period is the entire lifespan of the beneficiary.  

However, if the beneficiary is married to the owner, the IRA can be treated as though it is the spouse’s own account.  


Do RMDs Apply to all Retirement Plans?

The RMDs detailed above are applicable to the following accounts:

  • 401(k)s
  • Profit-sharing plans
  • Traditional IRAs
  • SEP IRAs
  • 403(b) plans
  • 457(b) plans
  • Additional defined contribution plans


How the RMD is Calculated 

The RMD for a specific year is determined as follows: the balance of the account at the end of the prior calendar year divided by the distribution period as detailed in the IRS Uniform Lifetime Table.  However, if the lone beneficiary is the spouse of the account owner and this individual is 10 or more years younger than the account holder, another table is used.  

Worksheets, the Uniform Lifetime Table, Table I for Single Life Expectancy, and Table II for Joint Life and Last Survivor Expectancy might also be used when determining the RMD as well as payout timelines.  If you are confused by RMDs and the materials used to determine payouts and timelines, you are not alone. 

At Prime Wealth Advisors we are passionate about helping our clients design and implement financial plans as unique as they are. Our advisors combine retirement and tax planning services to provide optimal outcomes for you and your family.


RMD Relief

A coronavirus relief bill was passed into law this past March.  The bill empowers those who have saved money for retirement to avoid RMDs that would have otherwise been required for IRAs and 2020 workplace retirement plans.  The 2020 RMD relief is also applicable to those named as beneficiaries of IRAS that are inherited.  

However, legally skipping the RMD is only permitted for 2020.  The entire year is considered a grace period as our nation struggles to ward off the coronavirus.

RMD relief in 2020 is applicable to those who hold IRAs and also those who have defined contribution plans including profit-sharing plans, 401(k) plans, and 403(b) plans.  Even those who own a Roth 401(k) plan are exempt from RMDs in 2020.  Those who inherit an IRA are typically required to draw down the account’s balance across the next decade in accordance with the Secure Act.  However, those who inherited an IRA in 2020 are permitted to bypass the distribution for the remainder of the year.


How to Proceed if You Were on Schedule to Take Your First RMD in 2020

If you were to take your initial RMD by the first of April in 2020 due to turning 70.5 in ’19, you can skip the withdrawal.  Furthermore, individuals in this position are also legally permitted to skip the 2020 distribution by year’s end.  

Those who took their RMD earlier in 2020 can return the RMD to the account if it is redeposited into the IRA 60 days or sooner after the distribution is taken as long as there has not been an IRA rollover in the prior 12 months.  If you have any additional questions or concerns about RMDs, contact Prime Wealth Advisors today, we are happy to answer any questions you have.

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