If you’re age 72 or older, you are most likely required to take minimum distributions from your retirement accounts by the end of the year—and that leaves you a pretty narrow window to meet the requirements to avoid any tax penalties. While there are a few exceptions for those taking their first required minimum distribution (RMD) and for those who are still working at the company who sponsors their 401(k) plan, the reality is that most senior investors have to pay close attention this time of year to ensure that they have taken the correct amount from the right accounts.
Most RMD-age investors take distributions throughout the year from their retirement accounts, and in December, make some final adjustments to make sure they are in compliance with IRS rules. However, we recently spoke with an investor who had multiple types of accounts and tried to take the distribution only from one account, which unfortunately left him with excess accumulation in some accounts while he took more than required from others. Truth is, RMDs can be complicated so help from a CPA or financial adviser is always a wise choice.
First, it is important to note that while you can generally aggregate your IRAs to calculate and withdraw an RMD, you cannot aggregate 401(k) accounts—each one must be calculated and withdrawn from separately. This is one of the arguments for consolidating your accounts as much as you can—especially at RMD age. The more accounts you have, the more chances you have for errors. Our unfortunate investor withdrew what he thought was his total RMD from only one IRA, which did not satisfy the 401(k) RMD requirements. Had we not worked with him he would have owed a penalty of 50% of the amount not withdrawn. Furthermore, any excess withdrawal from an IRA beyond the RMD is just a normal withdrawal. It cannot be carried forward to next year’s RMD nor can an investor put it back. While you don’t have to spend it—you do have to pay taxes on the withdrawal.
Secondly, this investor also had inherited IRAs, one from his deceased first wife and one from his brother. The nuance here is that his first wife’s IRA could be rolled into his own IRA and treated as if the assets were always his. The IRA he inherited from his brother is considered a non-spousal inherited IRA, and those have much different withdrawal requirements. Not only does it depend on when his brother died, but it also depends on how old he was when he passed and if the brother had begun his RMDs.
Finally, this investor had overlooked that IRAs are owned individually and thus each individual is responsible for their own RMD and that his wife’s RMDs were separate even though they file a joint tax return.
While the IRS has made correcting RMD mistakes easier and has allowed taxpayers to request a waiver of the penalty for those who take reasonable steps to remedy an RMD shortfall, it is still up to the taxpayer to ensure they are fulfilling their RMD by the deadline, yearly.
If you have questions on calculating your required minimum distributions, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166