Required minimum distributions for retirement accounts – non-beneficiaries

December, 02 2014 by Chris Rubino

Did you retire this year, or did you turn 70 prior to July 1^st?  If you fall into either one of these situations you may have to start thinking about Required Minimum Distributions (RMDs). Why give something that sounds so boring any thought at all? Because the tax consequences are among the stiffest, as an additional tax is assessed at an amount that is equal to 50% of the RMD not taken.

If you have or had a qualified retirement plan, including but not limited to stock bonus, 401(k) (including Roth 401(k) accounts), pension, profit-sharing, annuity contracts, traditional IRAs, and SEP, SARSEP, and SIMPLE IRA plans, you are required to start taking distributions on any amounts remaining in these plans by the later of:

• The year you reach age 70 ½, or
• The year you retire.

(For IRA owners and folks who are more than 5% owners of a business that sponsors a retirement plan only the age requirement applies.)

You have until April 1^st of the calendar year following the year in which you reach this milestone to take the first distribution, although you may take the first RMD within the calendar year you turn 70 ½ or retire, if you choose to do so. After the first RMD, each RMD for every subsequent year must be made by December 31^st.

The first distribution is considered made for the year in which you reached the milestone triggering the RMD requirement, so it is possible for you to have to take two RMDs within the same tax year if you wait until after December 31^st to take the first RMD. For example, let’s say you own a traditional IRA account and your birthday is March 1, 1944. Therefore, you reached age 70 ½ in 2014, and your first RMD is required to be taken by April 1^st of 2015. You may take this distribution anytime in 2014, or wait until April 1, 2015. You therefore wait, and take the first distribution from this IRA on March 15, 2015. In this instance, this March 15^th distribution counts toward the first RMD for 2014. You must take another distribution for the 2015 tax year by December 31, 2015, and then another RMD for every subsequent year.

As with most things involving taxes, it is your responsibility to see to it that you take the proper amount of RMD. The calculations are not necessarily easy to make, but the financial institution that holds your account should be able to calculate the RMD for you if you ask them to. RMDs are based on your life expectancy, and one of two tables is used. One table applies if the sole beneficiary of your account is your spouse who is more than 10 years younger than you, and another table is used for any other circumstance. RMDs for IRAs and 403(b) plans have to be calculated using the total account values in all similar plans, but the total of the RMD can be distributed from a single account. For other types of qualified accounts, the RMD has to be calculated and taken on an account by account basis. If you must calculate your own RMDs, the life expectancy tables and worksheets to assist you in these calculations can be found in IRS Publication 590 Individual Retirement Arrangements (IRAs) that can be downloaded here.

There is a separate set of RMD requirements for account beneficiaries.