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Published: Jan 27, 2021 4 min read

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Older adults got a special tax break last year, but the requirement to withdraw money from your retirement accounts is back on for 2021. If you returned any withdrawals you didn’t need in 2020, understand how you’ll report that on your taxes this spring. And plan to resume withdrawals this year so you won’t face a penalty.

The government waived required minimum distributions (RMDs) in 2020 as part of the pandemic relief law passed last March. Thanks to the CARES Act, older adults didn’t have to withdraw money from their retirement accounts and have it count towards their taxable income for the year. (This waiver benefitted those who turned 72 in 2020 or were 70 ½ before 2020, and also those who inherited IRAs.)

RMDs are Uncle Sam’s way of finally collecting his cut of the savings that’s grown tax-deferred over the decades. They apply to all types of retirement plans including IRAs, 401(k)s, 403(b)s, 457(b)s, and inherited IRA plans. (Roth IRAs are only subject to withdrawals when the account owner dies.)

Those who withdrew an RMD early last year were allowed to return it by Aug. 31, 2020 and not have it count towards their taxable income for the year. If you did this, you’re going to receive two forms from your financial institution: a Form 1099-R noting the distribution and a Form 5498 noting the re-contribution. Firms have until May 31 to send out the Form 5498, so yours might not arrive until after the April 15 tax deadline.

The instructions for the IRS Form 1040 explain how to report contributions to your retirement account, whether they're related to the special RMD waiver or something else. As outlined on pages 25 to 27, the amount of the distribution is generally shown on Line 4a (for an IRA), or 5a (for some other kind of retirement plan). Any taxable portion, which would be zero last year if the money was all rolled back by the Aug. 31 deadline, is shown on Line 4b (for an IRA) or 5b (for some other type of retirement plan). You then write the notation “Rollover” next to either 4b or 5b, whichever applies, an IRS spokesman tells Money.

Required minimum distributions are back for 2021, and the calculation will be based on your retirement account balance as of Dec. 31, 2020 and your life expectancy factor as designated by the IRS. The penalty for not taking RMDs is steep: 50% of the money you didn’t withdraw on time.

An easy way to fulfill your obligation is to put it on auto-pilot. Many financial firms allow your RMDs to be withdrawn on your preferred timetable, whether that’s monthly or quarterly or yearly. About half of Fidelity’s RMD-age clients automated as of late 2019, says John Boroff, director of retirement and college leadership, Fidelity Investments. If you turned off your automation last year, make sure it's back on now.

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