Older taxpayers need to keep a careful eye on their required minimum distributions (RMDs) for the year, as a stiff penalty applies to those who don’t withdraw enough from their retirement accounts.
Take the RMD or pay a big penalty. Taxpayers must start taking annual RMDs from their traditional IRAs by April 1 following the year in which they attain age 70 1/2. As for qualified plans like a 401(k), 5% owners are subject to the same rules as apply for IRA owners. However, for a non-5% owner, RMDs must commence by April 1 of the year following the later of the year in which the taxpayer (a) reaches age 70 1/2, or (b) retires. (Code Sec. 401(a)(9), Code Sec. 408(a)(6)) Failure to withdraw the annual RMD could expose the taxpayer to a penalty tax equal to 50% of the excess of the amount that should have been withdrawn over the amount that actually was withdrawn. (Code Sec. 4974) The amount of each RMD is calculated separately for each IRA. However, the RMD amounts for the separate IRAs may be totaled and the aggregated RMD amount may be paid out from any one or more of the IRA accounts. (Reg. § 1.408-8, Q&A 9)
Example: Jack has two separate traditional IRAs. The RMD from IRA-A is $6,000, and the RMD from IRA-B is $4,000. He may take his total $10,000 RMD from either IRA-A or IRA-B, or take distributions from both, as long as the total IRA payout for the year is $10,000. This rule gives flexibility to owners of multiple IRAs, especially during stock market declines. For example, if an IRA is invested in stocks or mutual fund shares whose price currently is depressed, the minimum distribution can be made from a money-market IRA, or another IRA invested in a fund showing gains, to avoid selling at a market low and losing future appreciation potential.
Many financial institutions automatically place each year’s RMD in a separate non-IRA account. This procedure avoids the risk of penalties for insufficient distributions. A taxpayer who wants to take his RMD from another IRA should notify the trustees or custodians of the IRAs from which he does not want to withdraw, in order to avoid potentially having an amount be automatically withdrawn from them.
The rule permitting amounts in traditional IRAs to be aggregated for RMD purposes applies only to IRAs that an individual holds as an owner. It doesn’t apply to IRAs that an individual holds as a beneficiary. IRAs held by a person as a beneficiary of the same decedent may be aggregated, but can’t be aggregated with amounts held in IRAs that the individual holds as the IRA owner or as the beneficiary of another decedent. And no traditional IRA can be aggregated with a qualified retirement plan account or a Roth IRA to determine payouts. (Reg. § 1.408-8, Q&A 9) Additionally, RMDs must be calculated separately for each qualified plan account and paid separately. (Reg. § 1.401(a)(9)-5, Q&A 1, Q&A 3)