Ready for an RMD Refresher?
By Jennifer Bassett, QKA, CIP, CISP, CHSP
Although the IRS encourages taxpayers to save for retirement in tax-deferred savings accounts, it does not allow them to keep their money there forever, delaying taxation. That’s why once a taxpayer attains age 70½, he usually needs to start taking annual distributions (i.e., required minimum distributions (RMDs)) from his Traditional IRA or retirement plan.
For the next few months your organization may see an increase in RMD questions and transactions. Take a few minutes now to learn (or relearn) some basic RMD rules.
Required Beginning Date
An IRA owner must take his first RMD by April 1 following the year he attains age 70½. This date is called the required beginning date (RBD).
For a plan participant, the RBD is April 1 of the calendar year following the later of
the calendar year in which the participant attains age 70½, or
the calendar year in which the participant retires from employment with the employer maintaining the plan.
All RMDs in subsequent years must be taken by December 31. The option to delay the RBD until actual retirement is not available to plan participants who own more than five percent of the business for which the plan is established. A delayed RBD is allowed only if the plan document allows for this provision.
Example
Jon and Cindy are ready to retire. Jon, born August 8, 1938, retired from his job earlier this year. His 401(k) plan allows him to delay taking his RMD until he retires. His wife, Cindy, was born June 19, 1949, and has a Traditional IRA.
Jon’s RBD is April 1, 2020 (assuming all assets remain in the plan until that date; if he takes any distributions before that date they will be applied to his retirement year RMD). Cindy’s RBD is April 1, 2020 (she turned 70½ in December 2019).
RMD Calculation
Plan administrators must calculate RMDs for plan participants, while financial organizations must either provide RMD estimates to IRA owners or offer to calculate RMDs for them and do so if requested. The RMD is generally calculated by dividing the previous year’s December 31 account balance by the applicable distribution period.
Account Balance
The previous year’s December 31 balance is used as the account balance, and is adjusted as follows.
Add any outstanding rollovers, which are distributions taken within the last 60 days of a year and rolled over after January 1 of the following year.
Add any outstanding transfers, which are transfers not received in the same calendar year as they were sent from the transferor IRA or retirement plan.
If a spouse IRA beneficiary age 70½ or older transfers or rolls over the inherited account in any year after the deceased IRA owner’s death year, add the deceased IRA owner’s prior year December 31 balance to the beneficiary’s balance for RMD determination.
NOTE: IRA balances used to determine RMDs will be reduced by any qualifying longevity annuity contract (QLAC) premium cost, which will reduce future RMDs.
For retirement plans that are not valued on the last day of the year, the starting point for calculating an RMD is the balance as of the last valuation date in the calendar year immediately preceding a year for which an RMD is due (the valuation year). Such amount is adjusted as follows.
Add any contributions or forfeitures allocated to the account balance after the valuation date, but during the valuation year.
Subtract any distributions made in the valuation year that may have occurred after the valuation date.
Distribution Period
The distribution period is a divisor that is used to calculate the RMD each year. This divisor is based on either the Uniform Lifetime Table or the Joint Life Expectancy Table, both of which can be found in Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs).
The account owner does not choose the divisor used to calculate the RMD; the divisor is based on the account owner’s age and the beneficiary designation for each IRA or retirement plan. To find the applicable distribution divisor, financial organizations and plan administrators must determine the account owner’s attained age in the distribution year.
Most account owners will use the Uniform Lifetime Table to calculate their RMDs. Some account owners may use the Joint Life Expectancy Table if both of the following requirements are met.
The account owner’s spouse is the only primary beneficiary during the entire year for which the RMD is being calculated.
The account owner’s spouse is 11 or more years younger than the account owner.
Penalties for Missed RMDs
During the early part of 2020, your organization may get calls from concerned account owners who forgot to take their 2019 RMD. Although they can still take their 2019 RMD in 2020, it will be reported as a 2020 distribution and the account owner could be subject to a penalty tax.
The IRS imposes a 50 percent excess accumulation penalty tax on the account owner for the portion of an RMD not taken by the deadline. Account owners may apply for a penalty waiver by attaching a brief letter of explanation to IRS Form 5329.
Plan participants may have an additional option. Instead of having the plan participant pay the 50 percent penalty tax, the retirement plan may assume responsibility for the missed RMD by going through the IRS’ Voluntary Correction Program (VCP) to correct the missed RMD. When corrected, the participant will not be subject to the excess accumulation penalty tax. The retirement plan must make sure the RMD is distributed to the participant when submitting through VCP. However, because the VCP fee for RMD failure corrections could be more expensive than the excess accumulation penalty tax, this approach may be most practical for plans that have multiple RMD failures.
Get Ready
Now that you know the basic RMD concepts, you and your staff will be better prepared during the next few months to help your clients with their RMD questions. For more information on RMDs, check out these related articles.
