Required Minimum Distribution Guidelines for 2021

What’s New for RMDs?

If you have a Traditional IRA or Traditional 401(k), you are required to start drawing Required Minimum Distributions (RMD) the year you reach age 72. 

To calculate the RMD, divide your account’s value by the value on the life expectancy table provided by the IRS. 

Five things you should know about RMDs

If you have more than one Traditional IRA, you must calculate the RMD for each account separately. However, you may withdraw the total required from any IRA account or any combination of IRA accounts.

1. You may withdraw an amount greater than the RMD amount but not less. 
2. There have been instances where Congress has waived the RDM for a year. 
3. If you hold an inherited IRA, you must withdraw the RMD from that inherited account.
4. Roth accounts do not require a RMD.
5. Congress changes the RDM chart from time to time to adjust for changes in our life expectancy.

Why is there an RMD?

When Congress created the IRA and 401(k) in 1974, it was to help people save for their retirement. The Federal Government would forgo collecting income taxes on the amount contributed to the Traditional IRA / 401(k) and any internal earnings by the account. Income-tax free profits help accounts grow more rapidly. As Congress offered this tax benefit to help us save for retirement, Congress also expects that at some point, you will retire, take distributions, and pay the income tax.

However, some people keep working. Perhaps they are in a position where they do not need to take a distribution. Hence, Congress had to set a deadline when people with a Traditional IRA or 401(k) must start taking distributions, retired or not. That deadline currently stands at age 72. 

How is the RMD computed? 

The IRS publishes a set of charts with an assigned life expectancy. The charts are blind. No matter if you are morbidly obese and a three-packs- day-smoker or  ifyou are fit as a fiddle, RMDs developed by the IRS treat us all the same.

Is the design of the RMD table fair? Yes, if you could design the life expectancy table, you would want it to give yourself (in the table) a long life expectancy. This is because the longer your life expectancy, the smaller the annual required distribution. 

The new RMD table 

This is what the IRS has done for us. They now assume we will all live to age 120, an increase from the old table that assumed a life expectancy of 115. Hence, starting in 2021, your per year RMD will slightly decrease because the chart is assuming a longer life expectancy. I.e., the IRS assumes you will need money for a longer period of time.    

Example

In 2021 if you are age 75 with a $100,000 Traditional IRA, your RMD would be $4,070.  How do I avoid the Required Minimum Distributions? Simple, convert your Traditional account to a Roth IRA. Roth IRAs have no RMDs. A Roth conversion is a taxable event, however, the Roth IRA has many benefits and no RMDs is one of those benefits.  

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