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All About RMDs

Tax Planning Retirement

What is an RMD?

Required Minimum Distributions, or RMDs, are the minimum amount an individual must withdraw from certain retirement accounts upon reaching the age of 70 ½. RMDs are generally required for IRAs (traditional, rollover, inherited, SEP, and SIMPLE) as well as Qualified Retirement Plans (Keoghs, 401(k)s, and 403(b)(7)s).  Roth IRAs do not require an RMD unless the account was inherited (additional info below).

How much do I have to withdraw to satisfy the RMD?

RMDs are calculated by dividing the balance of the account on December 31 of the previous year by a life expectancy factor published by the IRS (Publication 590-B).  Generally, your investment advisor, IRA custodian, or plan administrator should calculate your RMD.  However, it is ultimately the responsibility of the account owner to calculate the distribution and ensure it is taken timely.

Can I take more than the minimum?

Yes.  There is no penalty for withdrawing more than the RMD from one or more of your accounts.  Keep in mind, however, that RMDs generally increase your taxable income.

If I take additional funds out of my IRA this year, can the amount in excess of the RMD be applied towards next year’s RMD?

No.  RMDs are calculated each year and no withdrawals over and above an RMD can be rolled to a future year.  Similarly, taking out more in the current year cannot make-up for taking out less than was required in a previous year.  

How much of my RMD is taxable?

In most cases, the entire amount of your RMD is taxable at your income tax rate.  If any of the RMD is a return of basis (your initial investment) or is a qualified distribution from a Roth, that amount is tax free.

What documentation will I receive about my RMD for tax time?

You should receive a Form 1099-R from the company that holds the account from whom you took the RMD(s).  Provide this form to your tax preparer to ensure that the income is properly reported on your return.

What happens if I forget or choose not to take an RMD?

You pay a penalty for not taking an RMD, not taking the full amount of the RMD, or not taking the RMD by the deadline.  The amount not withdrawn is taxed at 50%.  In other words, you will pay a tax on the money you didn’t withdraw.  This amount is calculated and included on your personal tax return.  In some cases, RMD penalties can be waived if the owner is able to prove the shortfall in distribution was due to a reasonable error and that steps are being taken to correct the error.

I have multiple accounts that require an RMD. Do I have to take a withdrawal from each account?

Some account types allow you to take the total required RMD from one single account.  For example, if you have an RMD of $6,000 spread over 4 IRAs, you can take $6,000 from one single account and avoid the 50% penalty.  If a husband and wife each have RMDs, they can utilize this option over their individual accounts, but cannot combine their total RMD requirement and avoid penalty.  In other words, if Spouse A has an RMD of $5,000 and Spouse B has a requirement of $7,000, they cannot take a $12,000 withdrawal from one or more of Spouse A’s accounts.  Spouse B would be subject to a 50% (or $3,500) penalty.

Not all account types allow you to take one distribution to satisfy the RMD of multiple accounts.  Check with your investment advisor or account administrator to see what options are available for your specific circumstance. 

I inherited a retirement account.  When do I have to start taking the RMD?

If you inherit the account from a spouse, you can choose to roll the IRA into your own IRA.  If that is the route you take, it becomes subject to normal RMD rules based on your age (i.e. you will be required to start taking the distributions when you reach 70 ½).

For individuals such as a child or sibling (spouses can elect this option if they choose) who receives an IRA after the death of a loved one, you may roll it over into an Inherited IRA.  The IRS generally requires that these beneficiaries begin taking RMDs from the inherited assets in the year following the death of the original account owner.  If the account owner passes in 2018, the beneficiaries would be required to take their first withdrawal by December 31, 2019.  The calculation of the RMD would be based on the beneficiaries age, not the original account owner.  If you inherit a Roth IRA, RMDs will be required even though they were not required for the original owner.      

I don’t need the money from an RMD right now and don’t want to pay taxes on the withdrawal.  What are my options?

A QCD, or Qualified Charitable Distribution, is a wonderful option that many retirees use to gift money to their church or a non-profit organization that they support.  For example, if an individual with an RMD of $5,000 selects to distribute all or part of that money directly to an organization, they satisfy the RMD requirement and the money is not added to their tax return as taxable income.  Be careful!  You cannot have the distribution sent to you and then you turn around and distribute it to a charity.  If that happens, the RMD will be added to your return as income and the amount will be added as a donation on Schedule A of your return.  If you do not itemize your deductions, you will see zero tax benefit from the donation and the amount of the RMD will be added to your taxable income.  If you would like to make a QCD, speak with your advisor or plan administrator prior to your next RMD about this option.  You will still receive a 1099-R with the distribution at tax time, so make sure the QCD box is checked on the form.