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RMDs are Back in 2021. What You Should Know

Required minimum distributions (RMDs) are back in 2021 after a hiatus in 2020. 

What are the rules for RMDs in 2021? Should you take your RMD monthly or annually? What amount is RMD based on?

FundX investment advisors answer these questions and more to help you get up to speed.

Six RMD FAQs

Q. When do I need to start taking RMDs?

A. As of January 1, 2020, RMDs start when you reach age 72. (The RMD age increased from 70½ to 72 through the SECURE Act, which passed in late 2019.) If you are 72 or older by December 31, 2021, you must withdraw a set amount from your IRA or pay a steep penalty of 50% the amount you should have withdrawn.

Q. What’s the RMD deadline: Apr. 1 or Dec. 31? 

A. Ordinarily, RMDs must be taken by December 31, however, for your first RMD, you have until April 1 of the year after you turn 72 to make the withdrawal. Remember that if you delay your first RMD until April, you’ll still need to take the second year’s RMD by December 31 of that year, and taking two RMDs in a single year could bump you into a higher income tax bracket.

Q. Why does my RMD change from year to year?

A. Your RMD is calculated by taking your account balance as of December 31st of the previous year divided by a distribution period from the IRS’s life expectancy (“uniform lifetime”) table. So, your RMD will change as your account grows or shrinks and as the IRS’s divisor changes. Starting in 2022, the IRS will use a new uniform lifetime table that will likely result in smaller RMDs.

You usually don’t have to calculate your RMD on your own; your custodian or brokerage firm will do it for regular IRAs. RMDs for inherited non-spousal IRAs typically aren’t calculated for you, so you may want to use an online calculator (Schwab and Fidelity both have RMD calculators) or talk to your advisor. We calculate RMDs each year for our wealth management clients.

Q. What if I have more than one IRA?

A. Each IRA you own will have its own RMD amount, however, you can usually take the required total of all of your RMDs from one of your IRA accounts or a combination of them. RMDs from inherited IRAs or qualified retirement plans, such as a 401(k) or 403(b), cannot be withdrawn from other accounts; these RMDs must come from their respective accounts. 

Q. Should I take my RMD monthly or annually? 

A. If you need the cash now, you can set up a monthly or quarterly withdrawal through your broker or custodian. You’ll also need to make sure the cash is available each month or quarter to accommodate the withdrawal.

If you don’t need the extra income, taking your RMD in one lump sum later in the year can give you time for extra tax-deferred growth in your account, since the stock market is often (though not always!) higher at the end of a year than at the start.

Q. What should I do with my RMD? Can I reinvest my RMD?

A. For our wealth management clients, we help them use their RMD in a way that works for their goals. For many clients, we reinvest their RMD in a taxable account so their assets can continue to grow over time.

For other clients, we help them use their RMD as part of their annual charitable giving: they can make a qualified charitable distribution (QCD) of up to $100,000 of their RMD. This helps them support worthy organizations and reduce the tax consequences of their RMDs. While ordinary RMDs are treated as taxable income, QCDs generally aren’t taxable.

Need help managing your RMDs? Talk to a FundX advisor to learn more about professional investment management.

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