With a hefty tax penalty for a missed required minimum distribution (RMD), it’s important for IRA owners and qualified retirement plan participants who must take an RMD to take it by the appropriate due date. However, in 2021 the appropriate date is not the same for all 72-year-olds; it’s either April 1, 2022 or December 31, 2021 depending on when they turned 70 ½. In 2021, making sure folks who are 72 take their RMD at the right time has a small but important timing wrinkle that could cost a missed RMD penalty of 50% of the amount that should have been taken but wasn’t.
Understanding RMD schedules and rules
The SECURE Act of 2019 raised the starting age for RMDs from 70 ½ to 72, so many folks who turned 72 in 2021 assume that 2021 is their initial RMD year; however, the SECURE Act limited the 72 starting age only to folks who did not turn 70 ½ in 2019. So, regardless of when they turn 72, if folks were 70 ½ in 2019, 2021 is not their initial distribution year but instead is a continuation of their RMD schedule that started in 2019 (when they turned 70 ½). Essentially, these folks are continuing their RMD schedule under the old 70 ½ rules, not starting RMDs under the new age 72 rules.
This small but important difference means that those that turned 72 in the first half of 2021 must take their RMDs by December 31, 2021, because they are continuing an RMD schedule (that began in 2019), while those who have or will turn 72 in the second half of 2021 have until April 1, 2022 to take their 2021 RMD. Please note that the folks that have until April 1, 2022 to take their 2021 RMD can also take their 2021 RMD in 2021 if they would like. Conversely, if they wait until 2022 to take their 2021 RMD they’ll have to take their 2022 RMD by December 31, 2022, meaning they’ll take two RMDs in 2022.
Further clouding the RMD timing issue for those that had a 2019 RMD is the fact that RMDs were waived in 2020 by the CARES Act, so it’s been a long time since they took an RMD. Putting these two issues together: misperceptions that the new age 72 RMD start date applies to everyone and that RMDs did not have to be taken in 2020, means many 72-year-olds run the risk of not taking their 2021 RMD at the right time. Improperly timing their RMD could result in them paying more tax on their RMD than necessary because of the size of the missed RMD penalty tax.
Let’s look at a couple of examples to illustrate how this rule would work for different folks who turn 72 in 2021.
Example 1 – Assume an IRA owner’s birthday is February 10, 1949. That means they turned age 70 in the first half of 2019 and turned 70 ½ on August 10, 2019. Because this owner turned 70 ½ in 2019 they follow the pre-SECURE Act RMD rules requiring distributions to begin at age 70 ½. All this means that the owner had a 2019 RMD that they could have waited to take until April 1, 2020 or they could have taken it in 2019. They also had a 2020 RMD (that was waived by the CARES Act), and now they have a 2021 RMD that must be taken by December 31, 2021 because they are operating under the old 70 ½ rules.
Example 2 – Assume an IRA owner’s birthday is October 4, 1949. This means they turned 70 on October 4, 2019 and 70 ½ on April 4, 2020. Because they did not turn 70 ½ in 2019 they were not required to take an RMD in 2019 under the old RMD rules, nor were they required to take an RMD in 2020 because they were not yet 72. Because they turned 72 in 2021 (on October 4, 2021) they have a 2022 RMD which they can take in either 2021 or by April 1, 2022.
Breaking down the 2021 RMD rules for 72-year-olds
- If their birthday is January 1, 1949 to June 30, 1949 then their 2021 RMD due date is December 31, 2021.
- If their birthday is July 1, 1949 to December 31, 1949 then their 2021 RMD due date is April 1, 2022.
If you have RMD or other planning related questions, contact Nationwide’s Advanced Consulting Group at ADVCG@nationwide.com.