If you reached age 70 ½ this year, or are older, you are required to take qualified plan minimum distributions. A qualified plan is an IRA or most company sponsored tax deferred savings plans. The penalty for failing to take your Required Minimum Distribution (RMD) is 50% of the amount that was required. Don’t panic if you missed an RMD in the past; the IRS is fairly forgiving if there is a reasonable explanation for the missed distribution and you proactively work towards correcting the error. One of our advisors can walk you through the process of reporting the error if you find yourself in this situation.
The timing of the first RMD differs from all subsequent distributions. In the year you turn 70 ½ you have until April 1st of the next year to take the distribution. Every year after you must take the distribution by December 31st of the current year. For most people it makes sense to take the first distribution in the current year so that you don’t ‘double-up’ on distributions the following year.
If you have several IRAs you don’t have to take a distribution from each of them. After determining the RMD amount from all IRAs you have, you can select which IRA to take the total distribution from. This is not the case for most company sponsored plans. The RMD for company sponsored plans must be calculated individually and the RMD must be taken from each plan; you cannot aggregate company sponsored plans. Two exceptions to this apply: 403(b) plans can be aggregated just like IRAs and if you are currently employed you do not have to take an RMD from your current company’s plan (but you must take RMDs from plans from previous employers).
Calculating the RMD is fairly straight forward. You determine the previous year-end balance of the plan and divide it by the factor found in the IRS’s Uniform Lifetime Table. If your spouse is your beneficiary and is more than 10 years younger than you, you would instead use the IRS’s Joint and Survivor Annuity Table. Each year you repeat the process using the appropriate age based table.
If you have inherited an IRA you are required to take RMDs regardless of your age. RMDs must begin the year after the person’s death who named you beneficiary. The calculation for inherited IRA distributions uses the IRS’s Single Life Table. After calculating the first RMD you do not return to the table each year; you simply subtract 1 year from the first factor used.
Many of our clients have RMDs that exceed their need for income. People who have excess RMDs, and who are charitably inclined, may want to consider a tax-free Qualified Charitable Distribution (QCD). If part, or all, of the RMD is distributed directly to the charity the distribution is excluded from income. An exclusion, especially for people receiving Social Security and/or not itemizing, is much more valuable than a deduction. In order to use the QCD specific requirements must be met. One of our advisors would be happy to help you explore this option.
Like everything in the tax code, IRA and qualified plan distributions are fairly complex. IRS Publication 590-b Distributions from Individual Retirement Arrangements (IRAs) provides a more detailed explanation to the rules than this article. If you would prefer not to wade through this publication (60 pages), we would be happy to meet with you to review your qualified plan holdings to determine what your current RMD is or, if you are under 70 ½, to project what your RMDs look like in the future.
Bruce Larsen – Financial advisor and author of “A Concise Guide to Taxes in Retirement.”