Individuals who are 72 and older are likely to have to take required minimum distributions (RMDs) in 2021, after the one year break. A tax accountant can help with these calculations because a few changes have been made. There are also a few idiosyncrasies that you will have to consider during your tax planning.
What is a RMD?
The required minimum distributions (RMD)I is the amount that you must take out of your account to avoid tax consequences. The CARES Act allowed investors to avoid making the withdrawal in 2020 because there was such as significant drop in the amount of money held in investment accounts. As consumers tried to rally from the pressures of the coronavirus epidemic, several dipped into their retirement funds and this caused the overall drop that was seen on national level.
How did the CARES Act affect retirement plans?
Under the CARES Act, the requirement to withdraw a minimum taxable amount from your 401(k) was suspended. The Act was also applied to several other types of retirement plans, such as IRAs. This amount was based on the age of the person who owned the retirement account. The age used was the age of the contributor before January 1, 2020.
This meant that throughout 2020, no RMDs were necessary. This was in stark contrast to other years, when by definition, you would have been required to take a minimum sum from your retirement account. While RMDs were not mandatory in 2020, you could still take one if you wished.
How did the CARES Act help investors with RMDs?
The CARES Act allowed investors to keep money in their accounts, instead of withdrawing it. This will help you to recoup some of your market losses when the economy starts to recover from the pandemic. This is a part of the overall purpose of the Act, which is to provide a stimulus for economic growth.
investors who wanted their RMDs to be used for cost of living expenses or even to start a small business during the pandemic, could still opt to remove the money if they found it beneficial to do so. Investors who may have entered a higher tax bracket in the future could still take the distribution now, so they could save more money in the future.
When you weren’t required to take the money out, it could stay there and keep on growing without any tax being applied to it. That directly benefitted you, as long as you didn’t need it immediately. Tax accountants can give you guidance on the steps to take now that the rules regarding your RMDs have changed once again .If you have lost money due to volatility in the market, our tax accountants can show you how the CARES Act and other laws can help you.