Required Minimum Distributions

Why do we have Required Minimum Distributions (RMD) from our retirement accounts?

The purpose of the RMD rules is to ensure people do not accumulate retirement accounts, defer taxation, and leave these retirement funds as an inheritance. Instead, Required Minimum Distributions force the holder to withdraw a portion of the funds as taxable distributions while still alive.

So, in essence our Federal Government wants you to “pony up” and pay your taxes.

What are the Rules?

The year you turn 70 ½ you need to calculate and take your RMD. For 2018 that means people born prior to 1948 should already be taking their annual RMD’s. However if you were born in 1948, you will need to take your first RMD in 2018 if you were born between January 1^st and June 30^th. If you were born in 1948 between July 1^st and December 31^st, you will turn 70 ½ in 2019 and that will be your first distribution year.

The rule goes further to say that you can postpone taking your first year RMD until April 1^st of the year after the year you reach 70 ½. If you choose to do so, you will need to take the previous year’s distribution by April 1^st and the current year’s by December 31^st. You will receive two distributions and need to report both in the same tax year. Why would you do so? This may make perfect sense, if your income will drop, perhaps because of retirement and place you in a lower income tax bracket the year you take two distributions.

If you turn 70 ½ and are working, you may not need to take an RMD from your current company Employer Sponsored plan, provided you are not a 5% or more owner of the company and the current Employer Sponsored Plan Document contains that provision, which many include. You can find this information in your plans “Summary Plan Description”. You will however, need to take RMD’s from other retirement assets, such as IRA’s and other 401K’s, and 403B plans owned. If prior to the previous year-end, you “rolled” those accounts into your current 401K, you may not be required to do so.

The Calculation Requirements

To calculate your RMD you’ll need the value of each of your retirement accounts on the last day of the previous year. You will then divide each year-end figure by your IRS provided life-expectancy factor. For example, let’s say you turned age 71 sometime in 2018. The factor is 26.5. Also let’s assume the value of your 1 retirement account totaled $1,000,000. Your 2018 RMD requirement will be $1,000,000 divided by 26.5 which equals $37,735.85. You must distribute $37,735.85 by 12/31/2018 or be faced with a potential IRS imposed penalty. For a listing of all age factors, please CLICK HERE for our Key Financial Data 2018. Look on page 2 to the right hand side at the “Uniform Lifetime Table” for all factors.

What if I have Multiple Accounts? (Aggregation Rules)

If you have 3 IRA’s you must calculate each RMD individually however you can take the sum total from any one or combination of the IRA’s.

If you have 3 401K’s you must calculate each RMD individually and you must take each distribution separately from each 401K.

If you have 3 403B’s, you must calculate each RMD individually however you can take the sum total from any one or combination of the 403b’s.

If you have 1 IRA, 1 401K and 1 403b, you must calculate the RMD requirements separately and take each separately from each of the accounts.

What if I miss taking my RMD?

The penalty for not withdrawing your RMD is 50% of what you were supposed to withdraw. If you did not withdraw funds by the deadline and your RMD is $10,000, you will owe $5,000 on top of the tax already owed.

Can I request a Waiver of this Penalty?

If you missed your RMD, don’t panic. The IRS may waive the 50% penalty for good cause. Here are three steps you will need to take to have the IRS consider a penalty waiver.

1. Take the RMD. To have the 50% penalty waived by the IRS you need to correct your error. You must take the RMD amount that was not taken in the missed year.
2. File the IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. When you file this form, you do not have to prepay the penalty, but if the form is filed without payment of the 50% penalty and IRS determines that the penalty is owed, you could owe interest on the penalty payment. Form 5329 must be filed to start the statute of limitations clock.
3. Attach a letter of explanation to Form 5329. The letter should include why the RMD was missed, the fact that it has now been taken, and that you have taken steps to be sure that future RMDs will be taken as required.

After submitting your request, you must wait for the IRS response.

Required Minimum Distributions are one of many tax topics we discuss at our Retirement Income Planning Workshops. For a listing of our upcoming informative workshops, please click Retirement Income Planning Workshop.