Follow the RMD Rules to Avoid Penalties

If you have either of the following retirement or IRA based plans, the Required Minimum Distributions (RMDs) rule applies to you.

• Traditional IRA;
• IRA based plans such as SIMPLE IRAs, SARSEPs, and SEPS;
• Employer sponsored retirement plans, including profit sharing plans, 401k plans, 403(b) plans, and 457(b) plans;
• ROTH 401k accounts; and
• Other defined contribution plan

The RMD rule requires that once an account holder reaches the age of 70-1/2 years old, it is mandatory that the he or she start making withdrawals from the account. The RMD rule does not apply to ROTH IRAs. ROTH IRAs don’t require withdrawals until after the death of the account owner.

What is an RMD?

An RMD is the minimum amount that the IRS requires an account owner to annually withdraw from his or her retirement account, starting with the year that he or she reaches the age of 70-1/2 years old, or, the year in which he or she retires if later than age 70-1/2 years old. If the account owner is a 5% owner of the business sponsoring the retirement plan, or the retirement plan is an IRA, the RMDs must start when the account holder is 70-1/2 years of age, regardless to whether he or she is retired or not. The account owner can withdraw more than the minimum amount. Except for any part that was taxed before (the account owner’s basis), or that can be received tax free, the distribution will be taxed as ordinary income.

What is the beginning date of your first RMD?

The beginning date of your first RMD will depend upon what type of retirement account it is. For IRAs, including SEP and SIMPLE IRAs, the beginning date is April 1 of the year following the calendar year in which the account holder turns 70-1/2 years old. For other defined contribution plans, 401k, 403(b), and profit sharing, the beginning date is generally April 1 following the later of the calendar year in which the account holder reaches age 70-1/2 years old or retires. For account holders who are 5% owners of the business sponsoring the plan, the beginning date is April 1st of the year after the calendar year in which the account holder reaches the age of 70-1/2 years old.

How to calculate RMD amount

Using the account balance as of the end of the immediately preceding calendar year divided by a
distribution period from the IRS’s “Uniform Lifetime Table” is how an account holder would calculate his or her required minimum distribution amount. Note that if the sole beneficiary is the account owner’s spouse, who is ten or more years younger than the account owner, a separate table is used.

Penalties for failure to withdraw RMD or required amount

There is a hefty penalty for not taking an RMD or failing to take the required amount by the required deadline date. Unless the IRS shows you leniency, the required minimum distribution amount that has not been withdrawn will be taxed at 50%. For each year that the full amount of the RMD has not been taken, the account holder should complete a Form 5329 (Additional Taxes on qualified Plans (Including IRAs) and Other Tax Favored Accounts) and file with his or her federal tax return. If the account owner establishes that the shortfall in distributions was due to reasonable error, and steps to remedy the shortfall are being taken, the account owner can request the penalty to be waived. While there is no guarantee that the IRS will waive the penalty, nothing beats a failure, but a try. To see if he or she qualifies schedule an appointment with one of our CPAs at the office.

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