The IRS requires that you begin receiving required minimum distributions (RMD) in the year you reach age 70½. That sounds simple enough, but unfortunately, calculating these distributions is not always easy, as there are a number of factors to consider. While a tax professional can certainly help you with this, it's a good idea to get to know the requirements that must be met in order to avoid IRS penalties. Here we look at some of the key rules that affect RMD calculations.
Rule 1: RMD Amounts Are Not Rollover Eligible
Amounts representing RMDs must not be rolled over to an IRA or other eligible retirement plan, and cannot be converted to a Roth IRA. If you roll over or convert your RMD, it will be treated as an excess contribution, which must be removed from the account by a certain time in order to avoid taxes and penalties. The first distribution from your IRA for any year an RMD is due is considered to be part of your RMD for that year and is therefore not rollover eligible. (For background reading, see Preparing For Retirement Plan RMD Season.)
Mary reached age 70½ in 2015. Her RMD for 2015 is $15,000. Since 2015 is the first RMD year for Mary, she may wait until April 1, 2016, to distribute her RMD for 2015. During 2015, Mary received a distribution of $7,000 from her IRA. Even though Mary is not required to take her 2015 RMD until April 1, 2016, the amount she received in 2015 cannot be rolled over as it is attributed to her RMD for 2015: any amount distributed during a year for which an RMD is due is considered to be part of the RMD until the full RMD amount has been distributed. If Mary had taken a distribution of $17,000, the amount that is in excess of the RMD amount ($2,000) is rollover eligible because the RMD for the year would already have been satisfied.
Rule 2: Aggregation of RMDs
If you participate in more than one qualified plan, your RMD for each plan must be determined separately, and each applicable amount must be distributed from the respective plan. RMD amounts for qualified plans cannot be distributed from IRAs and vice versa. However, if you own multiple IRAs or multiple 403(b) amounts, you may aggregate the RMD for all similar plans (Traditional IRAs or 403(b)s) and then take the amount from one account of each type of plan.
Here are Sam's options for his various accounts:
Rule 3: Transferring Your IRA in an RMD Year
Prior to 2002, many IRA custodians would not allow an IRA owner to transfer an RMD amount to another IRA custodian. The IRA owner would have been required either to distribute the RMD amount prior to the transfer or leave the RMD amount behind to be distributed by the applicable deadline. This is no longer required. As allowed by the final RMD regulations, you may transfer your entire IRA balance even if an RMD is due, provided you take the RMD from the receiving IRA by the applicable deadline.
Rule 4: Death and Divorce Do Not Affect the Current Year's Calculation
If you were married on January 1 of the year for which the calculation is being done, you are, for RMD calculation purposes, treated as married for the entire year even if you divorce or your spouse dies later in that year. This means that if your spouse beneficiary is more than 10 years younger than you, you may still use the "Joint Life and Last Survivor Expectancy" Table II in Appendix B of IRS Publication 590-B. Any new beneficiaries are taken into consideration for the following year's calculation. (For more insight, read Life Expectancy: It's More Than Just a Number.)
Rule 5: Family-Attribution Rule
An individual who owns more than 5% of a business is not allowed to delay beginning the RMD for a non-IRA retirement plan beyond April 1 of the year following the year he or she reaches age 70½, even if the individual is still employed. If you own more than 5% of a business and your spouse and/or children are employed by the same business, your ownership may be attributed to them. This means that they, too, may be considered owners and could be subject to the same deadline as you.
Rule 6: IRA Custodian Reporting Requirement
Each year the custodians/trustees of your Traditional IRA, SEP and/or SIMPLE IRA must send you an RMD notification as long as they held your IRA on December 31 of the preceding year. This notification must be sent to you by January 31 of the year for which the RMD applies. Some custodians will include a calculation of your RMD amount for the year, while others will inform you that an RMD is due and only offer to compute the amount upon your request.
The Bottom Line
If you know someone who has reached RMD age, be sure to tell him or her about the rules. Bear in mind that the rules discussed herein are certainly not exhaustive. Individuals should check with their tax professionals to ensure that RMD calculations and distributions meet regulatory requirements.