This is a common question I receive. Annual required minimum distributions (RMDs) must be taken from traditional IRAs, SIMPLE IRAs, and SEP IRAs beginning in the year when the taxpayer reaches age 70 ½. The first payment can be delayed until April 1 of the following year, but the second payment must then be taken by the end of that year. Therefore, the taxpayer will be reporting two distributions that first year.
RMDs are not required to be taken from ROTH IRAs. Distributions are required after the death of the participant.
RMDs from qualified employer plans generally must start by April 1 of the year following the year when the participant reaches age 70 ½. There is an exception if the plan allows it where the participant can wait to take distributions in the year following their retirement from the employer if they work past age 70 1/2. This exception does not apply to an individual who owns more than 5% of the employer sponsoring the plan.
If the correct amount is not timely distributed, a penalty of 50% can be assessed on the excess amount. This penalty can be waived for reasonable errors and if it can be shown that the error is being corrected.
If there is more than one traditional IRA, an RMD must be calculated for all accounts. The total amount to be distributed can be withdrawn from one account.
In the year of death, the amount of the RMD is calculated for the entire year without regard to the owner’s date of death. The beneficiary must withdraw the RMD unless they are a surviving spouse. They can treat the IRA as their own and follow the normal rules. They may not be required to take an RMD based on their age. If the surviving spouse treats the IRA as their own, the RMD for that year is calculated based upon the deceased participant. A surviving spouse who is not yet 59 ½ can take distributions from the IRA without penalty by electing to be treated as a nonspouse beneficiary. A nonspouse beneficiary cannot roll over inherited IRA distributions to their own IRAs. They cannot make contributions to the IRA.
If you inherit an IRA and you are not the surviving spouse, you must begin taking distributions by the end of the year following the death of the participant. You can elect to have the entire balance distributed under the five-year rule. The balance must be distributed by the end of the calendar year, five years after the date of death.
If you don’t want or need the income, consider a qualified charitable distribution (QCD). In a nutshell, these are direct transfers from your IRA to a qualified charity. The limit is $100,000 per year and the amount counts as your RMD.
By: Jeannie Clark, CPA
Senior Manager, Onisko & Scholz