(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Mark Miller
CHICAGO, Dec 14 Ed Slott is one of the nation's
top experts on IRAs. But a couple of years ago, someone near and
dear to him neglected to take a required minimum distribution
from one of her individual retirement accounts.
"It happened to my mother," Slott admitted with a laugh - an
ironic story for someone who has written numerous books on
retirement distribution planning, and who also hosts a popular
financial advice series on public television and trains
financial advisers on IRAs.
"Her adviser just forgot about one of her accounts," said
Slott, who is based in Rockville Centre, New York. "That shows
you how easy it can be for this to fall through the cracks."
Internal Revenue Service rules require retirement investors
to begin withdrawing a certain amount annually from traditional
IRAs (not Roths) and 401(k) accounts in the year that they reach
age 70-1/2. The deadline for most required minimum distributions
(RMDs) is Dec. 31, so this is a good time to double-check on
your retirement accounts, or those of any family members you
might be assisting with money management. Missing the RMD
deadline leaves you on the hook for an onerous 50 percent tax
penalty - plus interest - on the amounts you failed to draw on
The RMD rules exist to limit the tax benefits of these
accounts to the years when you save for retirement; income taxes
on withdrawn assets are due in the year of your drawdown.
But RMDs can be a real headache. They can trigger an
increase in income taxes if they push you into a higher bracket
- and they can trigger higher taxes on Social Security benefits
and substantial high-income surcharges on Medicare premiums.
All IRAs and 401(k) account owners who have reached the
magic age are subject to the RMD rules. One exception: if you
are still working for the company that sponsors your 401(k), the
IRS rules do not require that you take a distribution.
There is also an exception to the Dec. 31 deadline. In the
year that you turn 70-1/2, you have until April 1 to take your
RMD. However, waiting until April means you will be taking two
distributions in the following year.
If you inherit an IRA, distributions are required unless you
received it from a spouse. The IRS rules on managing your
inherited IRA can be found here: (bit.ly/2hqH5wp)
RMDs must be calculated for each account you own by dividing
the prior Dec. 31 balance with a life expectancy factor that you
can find in IRS Publication 590. Often, your account provider
will calculate RMDs for you - but the final responsibility is
yours. The Financial Industry Regulatory Authority, the
financial services self-regulatory agency, offers a calculator
to help figure out RMDs (bit.ly/1xKMPWm).
Slott warns that the rules are especially tricky for people
who have multiple accounts. "People often ask which of their
RMDs can be combined and taken from one account - they often
think it doesn't matter where the distribution comes from," he
said. "But they're wrong."
The IRS rules require that RMDs must be calculated
separately for all the accounts you own. In some cases, RMD
amounts can be added together and the distribution taken as you
like from one or more of the accounts. Any type of IRA accounts
can be aggregated, which means you could total up your RMDs and
take it all from one IRA - one that is a poor performer,
perhaps, or one that will help you rebalance an account that
might be overweight in equities in your allocation plan.
Multiple 403(b) accounts also can be aggregated, but you
cannot satisfy an RMD from an IRA with funds from a 403(b), or
vice versa. And 401(k) RMDs cannot be aggregated at all - if you
have more than one 401(k) account from former or current
employers, those RMDs cannot be aggregated - you must take the
RMD from the accounts separately.
KEEP IT SIMPLE
Slott notes that simplicity is the retirement investor's
friend when it comes to RMDs - consolidating IRAs reduces
paperwork and complexity. Likewise, consolidating 401(k)
accounts during your career makes it easier to track investments
and RMDs - and even avoid them if you are still working at age
The 50 percent penalty is a tough pill to swallow - but
Slott says the IRS often will waive the penalty if you make a
mistake but can offer a "reasonable cause" for the error. First,
take corrective action immediately by taking the required
distribution. Then, file IRS Form 5329, explaining in one
written sentence how you screwed up. "You were confused by the
rules, or you miscalculated, or your financial adviser made an
error," he suggests.
"It's easy to get it waived," he added. "That's what
happened in my mother's case."
(Editing by Matthew Lewis)