The rules for required retirement account withdrawals

June 14, 2021

At some point in retirement, government rules require people to take some money out of their tax- protected accounts every year, pay the tax or else face penalties. During the COVID-19 pandemic, there was a temporary hold on this, but these required minimum distributions are now back.

Marketplace senior economics contributor Chris Farrell spoke to “Marketplace Morning Report” host David Brancaccio about this. The following is an edited transcript of their conversation.

David Brancaccio: All right, so let’s just be clear: What is this required minimum distribution? Some call it the old RMD.

Chris Farrell: OK, so if you have a retirement savings plan, like a traditional IRA or a 401(k), you eventually have to start withdrawing money from the account or the accounts, because the money that goes into these plans, David, it’s pre-tax dollars. So to make sure that your 401(k) doesn’t turn into a permanent tax shelter, when you hit the required age, you must start making withdrawals and pay your ordinary income tax rate on the amount that’s taken out. And, by the way, the penalty for not taking your RMD, it can be a hefty 50%.

Brancaccio: Hear ye, hear ye. The penalty could be 50%. But, because the pandemic, there were some changes to these rules, and other changes in recent years. But who has to start again, or start, taking this required minimum distribution in this year, 2021?

Farrell: So in late 2019, the SECURE Act was passed, and among the changes was raising the age for the required minimum distributions to 72. So, to your question, anyone born on July 1, 1949, or after, can wait until age 72 before making their first mandated minimum withdrawals. The age for required minimum distributions was 70 1/2 before the legislation. So, for those who had started paying it before the pandemic, resume your payments.

Brancaccio: Now, there’s some complexity here. Check with your accountant first, right?

Farrell: Absolutely. I mean, the actual calculation is not that hard. But, David, there are these head-scratching turns.

Let me just give me one example. Let’s say you have more than one IRA. You figure out your RMD for each account first, and then you withdraw the total amount, from one IRA or each IRA, it’s your choice.

But let’s say you have multiple 401(k)s. You must take separate RMDs from each account. Go figure.

Brancaccio: So, you’re hearing this? IRA is not synonymous with 401(k) when it comes to the required minimum distribution.

And you got something else there?

Farrell: Well, I think there are two other things that I want to emphasize. One, if you’re still working, you don’t have to make required minimum distributions. And secondly, the rules have changed with inherited IRAs. So that’s a classic case of check with your accountant first.