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Mandatory Retirement Account Distributions

Sunday, December 10th, 2017

You faithfully make your annual contributions to your IRA or 401(k) accounts.  You’ve been doing this for years, maybe decades.  Can you keep your retirement funds in your account indefinitely?  Of course not.  You generally have to start taking withdrawals from your IRA, Simple IRA, SEP IRA, or other retirement plan account when you reach age 70 ½.  The following is an overview of the requirements.

The IRS requires all traditional IRA owners to withdraw at least a minimum amount from their IRAs.  The amount is referred to as a Required Minimum Distribution (RMD).  Your RMD will be included in your taxable income except for any part that was previously taxed (e.g. non-deductible IRA contributions).  Your first RMD must occur by April 1 following the year in which you reach age 70 ½.  Each year thereafter, the deadline for taking your RMD is December 31.  Thus, the first year following the year you reach age 70 ½ you will generally have two required distribution dates:  an April 1 withdrawal (for the year you turn 70 ½), and an additional withdrawal by December 31 (for the year following the year you turn 70 ½).  To avoid having both of these amounts included in your income for the same tax year, you can make your first withdrawal by December 31 of the year you turn 70 1/2 instead of waiting until April 1 of the following year.

If you miss a withdrawal or take out less than the required amount, the IRS may impose a 50% excise penalty tax on the shortfall.  For example, if your RMD for the year is calculated to be $10,000 and you do not take any distribution as required, the IRS may assess a penalty of $5,000 in addition to the requirement to withdraw the correct amount and pay any income tax due.

Roth IRAs are an exception.  They do not require mandatory withdrawals until after the death of the owner.  Also, a withdrawal from a Roth IRA cannot be used to satisfy your RMD requirement.  Another exception may apply if you work beyond age 70 ½.  You may be able to defer mandatory distributions from your current employer’s 401(k), 403(b), or other defined contribution plan, until April 1 of the year after which you retire.  Alternatively, your employer’s plan may require you to begin receiving distributions by April 1 of the year after you reach age 70 ½, even if you have not retired.  Also, if you own 5% or more of the business sponsoring the plan, then you must begin receiving distributions by April 1 of the year after the calendar year in which you reach age 70 ½.

To calculate your RMD for any year, you take the account balance of your IRA as of the end of the immediately preceding calendar year and divide by your life expectancy multiple provided in IRS Publication 590.  The life expectancy multiple is determined by your age and your spouse’s age, if applicable.  If you have more than one IRA, the minimum distribution regulations generally require you to calculate an RMD amount separately for each IRA.  You may add together the RMD amounts for all of your IRAs and withdraw the amount from any one or more of your IRAs.  However, if you have other types of retirement plans, such as a 401(k), you will need to take the RMD from each plan.  You cannot aggregate across various types of retirement plans.

RMDs continue after the account owner dies.  For the year of the account owner’s death, use the RMD the account owner would have received.  For the year following the owner’s death, the RMD will depend on the identity of the designated beneficiary.

A designated spouse has several options with respect to the account.  Spouses can treat an IRA as their own; base RMDs on their own current age; base RMDs on the decedent’s age at death, reducing the distribution period by one each year; or withdraw the entire account balance by the end of the 5th year following the account owner’s death, if the account owner died before the required beginning date.  With the latter option, a surviving spouse can wait until the owner would have turned 70 ½ to begin receiving RMDs.

Other designated beneficiaries can withdraw the entire account balance by the end of the 5th year following the account owner’s death, if the account owner died before the required beginning date, or calculate RMDs using the distribution period from the Single Life Table found in Appendix B of Publication 590-B.  RMD calculations from the Table will depend on whether the account owner died before or after the RMDs began.

These are some of the considerations to keep in mind as you approach age 70 ½ (or if you already are there), and have to start taking withdrawals from your traditional IRA or other retirement plan account.  As is often the case, understanding the requirements and tax consequences involved with required minimum distributions can be confusing.

At Anderson & Jahde, PC, we can help you navigate these waters and avoid penalties.  If you need help call Tom Hodel (303-782-0015) at Anderson & Jahde, PC.

This entry was posted on Sunday, December 10th, 2017 at 7:43 pm and is filed under Articles.