RMD Confusion

The Internal Revenue Service (IRS) can be downright nasty, mean, and somewhat unfair to normal law abiding tax payers who unintentionally miss or forget to withdraw a certain amount of money from their retirement accounts.  I’m talking about a 50% penalty assessment (one of the highest in the Internal Revenue Code ‘IRC’) just because someone didn’t take their Required Minimum Distribution (RMD) on time.  Yes, this is our US tax law.

Interestingly, this 50% penalty doesn’t just apply to the aging population (those who are over the age of 70 ½ years old); it applies to anyone at any age who is required to ‘take their distribution’…and that’s where it can get tricky.

Once an account has triggered this mandatory withdrawal requirement, the Required Minimum Distribution (RMD) rules mandate that an owner of a qualified retirement account (i.e. Traditional IRA, 401(k), 403(b), etc.) must begin withdrawing a certain percentage of the balance each year and pay taxes on it.  In other words, the IRS feels that you have enjoyed your tax-deferred ride long enough, and now you must begin paying your share of taxes on that earned income.

Typically, a person becomes affected by this rule once they attain the age of 70 ½ years old. The exact wording from the IRS.gov website says: “April 1 of the year following the calendar year in which you reach age 70½.”  How quickly can you determine your RMD from that sentence?  It gets even more complicated when people die and leave a retirement account to their beneficiaries.

To save you time from looking it up, I cut and pasted the rules and options directly from the IRS website for beneficiaries of their parents’, spouse’s, or a friend’s qualified retirement plan.  These would be known as a Beneficiary IRA account.  Breeze through it below, or you can jump to it here: [button color=”green” link=”http://www.irs.gov/pub/irs-pdf/p590.pdf” size=”default” target=”_self” block=”false”]IRS Section 590[/button]

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Calculating required minimum distributions for designated beneficiaries

Beneficiaries of retirement accounts and IRAs calculate RMDs using the Single Life Table (Table I, Appendix C, Publication 590Individual Retirement Arrangements (IRAs)). The table shows a life expectancy based on the beneficiary’s age. The account balance is divided by this life expectancy to determine the RMD.

  • Spouses who are the sole designated beneficiary can:
    • treat an IRA as their own, or
    • 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.

If the account owner died before the required beginning date, the surviving spouse can wait until the owner would have turned 70½ to begin receiving RMDs

  • Individual beneficiaries other than a spouse 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 based on:
      • If the owner died after RMDs began, the longer of the:
        • beneficiary’s remaining life expectancy determined in the year following the year of the owner’s death reduced by one for each subsequent year or
        • owner’s remaining life expectancy at death, reduced by one for each subsequent year
      • If the account owner died before RMDs began, the beneficiary’s age at year-end following the year of the owner’s death, reducing the distribution period by one for each subsequent year.

See Publication 590Individual Retirement Arrangements (IRAs), for details on calculating required distributions for beneficiaries.

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It is this exact reason that we sometimes pay professionals to provide us a simple answer to a seemingly simple question.  My point isn’t necessarily to educate you on RMDs so that you can calculate yours or your neighbor’s withdrawal schedule.  It is more to the point that trying to learn about and determine solutions regarding retirement, RMDs, savings levels, insurance needs, and estate planning is enough to require a full-time position to study and monitor these areas to ensure you are ‘doing it right.’

Or, you can call my office [button color=”orange” link=”https://frankvirgallito.com/contact/” size=”default” icon_before=”” target=”_self” block=”false”]Call Me!![/button]to receive an explanation in layman’s terms “what it is that you need to (or should) do” for your next step to keep your financial house in order.  I’ll even provide you with the exact date and amount required for your next RMD to help you avoid that nasty 50% IRS penalty!!