Refining RMD Procedures for Baby Boomer IRA Owners
by Alison Wiegman, CIS, CIP, CISP, CHSP
July 2016 marked the beginning of the baby boomer generation turning age 70½, which marks another beginning: annual required minimum distributions (RMDs). Those who own a Traditional (or SIMPLE) IRA are required to start withdrawing RMDs from their IRAs at age 70½. With the growing number of baby boomers turning age 70½ and older, now is the time to refine your RMD procedures and educate staff and IRA owner clients on the RMD rules.
When reviewing RMD procedures, confirm that your organization is sending RMD statements to IRA owners by January 31 of the year for which an RMD is due. These statements report that an RMD is required for the year. IRS Notice 2002-27 allows financial organizations to create RMD statements using one of the two following alternatives.
Alternative 1 – Provide a statement to the IRA owner that reports the IRA’s RMD for the calendar year and the date by which that RMD must be distributed. Your organization may use the Uniform Lifetime Table to calculate the RMD. The IRA’s December 31 balance does not need to be adjusted for amounts received after December 31 of the prior year, such as outstanding rollovers or transfers.
Alternative 2 – Provide a statement to the IRA owner that
informs him of the requirement to take an RMD for the calendar year,
lists the date by which the RMD must be distributed, and
offers to provide the RMD amount upon request. (Your organization must provide the RMD amount to the IRA owner if it’s requested.)
While the RMD statement notes that an RMD is required, many IRA owners fail to take their RMDs because they aren’t familiar with the rules. Your organization could send letters or booklets to baby boomers at the beginning of their 70½ year, explaining the following requirements.
An IRA owner may delay his first RMD payment to April 1 of the year after he attains age 70½. But if the first payment is delayed, the IRA owner will receive two RMD payments in the same year—one for his 70½ year (taken by April 1) and one for the following year (taken by December 31). Note that taking two payments in one year may increase the amount of the IRA owner’s taxable income.
Excess Accumulation Penalty Tax
If an RMD is not satisfied by the deadline, the IRS may assess a 50 percent penalty tax on the amount of the RMD that was not taken.
In the year that an IRA owner attains age 70½, she can no longer make regular Traditional IRA contributions. But if she is still working and has earned income within the applicable modified adjusted gross income limits, she can continue making regular Roth IRA contributions. Participants in SIMPLE (savings incentive match plan for employees of small employers) IRA plans—including the self-employed—may continue making SIMPLE IRA contributions after age 70½, but RMDs must be taken, based on year-end balances.
If an IRA owner does not make a withholding election, the financial organization must withhold 10 percent for federal income tax purposes. State withholding requirements may also apply.
Your organization may also want to provide additional information.
If a client owns multiple IRAs, he may satisfy each RMD by removing the total RMD amount from one or several—not necessarily all—IRAs.
To avoid future RMDs, IRA owners may convert their Traditional IRAs to a Roth IRA. (The current year’s RMD must be satisfied before the conversion occurs.) They may also roll over amounts to a qualified retirement plan if still a participant and not a 5 percent owner of the sponsoring business, and similarly limit future RMDs until they retire.
IRA owners may use their RMDs to make qualified charitable distributions, which are donated directly to a qualified charity and are nontaxable to the IRA owner.
RMD Election Forms
Many financial organizations require IRA owners to complete an RMD election form. This form tracks how the IRA owner wishes to receive her RMD (e.g., frequency of payments, withholding election, and payment method). The form may either be completed every year, or the IRA owner may complete one election that remains in effect until she notifies the organization that she wishes to change it.
Refining your organization’s RMD procedures will help ensure that your staff correctly answers IRA owners’ questions. This will help your IRA owners—including baby boomers—better understand the RMD rules. This way, baby boomers can stress less about the IRS and focus on what retirement has to offer.
And for Fully-Administered Clients…
If your financial organization is enrolled in Ascensus’ IRA Fully-Administered Program and we complete your tax reporting, we use Alternative 1 to send RMD statements to your IRA owners so you don’t have to.
In February, we also send an RMD election form and booklet that outlines payment options to each of your IRA owners who do not yet have an RMD election established in IRAdirect®. Once completed and saved in IRAdirect, each IRA owner’s election remains in effect each subsequent year until she notifies your organization about making a change.
Furthermore, your organization has access to periodic payment reports, which can be pulled at any time to determine the RMD amount to distribute to an IRA owner for a particular month.
If the RMD or withholding amount listed in your data processing system differs by a few cents from the amount(s) listed in IRAdirect, we suggest that you distribute or withhold the amount listed in IRAdirect. This difference is simply a rounding issue that occasionally occurs when certain data processing systems round down to the nearest dollar and IRAdirect rounds up, or vice versa. Distributing or withholding based on the amounts listed in IRAdirect ensures that tax reporting is accurately completed for your IRA owners.
IRAdirect® is a registered trademark of Ascensus, LLC.