Here in part 2 we continue from part 1 to look at more important rules affecting RMD calculations.

Caution - 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 rollover 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.

Example Mary reached age 70.5 in 2003. Her RMD for 2003 is $15,000. Since 2003 is the first RMD year for Mary, she may wait until Apr 1, 2004, to distribute her RMD for 2003. During 2003, Mary received a distribution of $7,000 from her IRA. Even though Mary is not required to take her 2003 RMD until Apr 1, 2004, the amount she received in 2003 cannot be rolled over as it is attributed to her RMD for 2003: 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 have already been satisfied.

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)) and then take the amount from one account of each type of plan. 
 

Example Sam, a 75-year-old retiree, has two Traditional IRAs and two 403(b) accounts. Sam also has assets in a profit sharing plan and a 401(k) plan with past employers. The RMD amount for each of Sam's retirement accounts is the following: IRA No.1 -$15,000 IRA No.2 - $8,000 403(b) No.1 - $6,000 403(b) No.2 - $4,500 Profit sharing account - $10,000 401(k) account - $12,000 Here are Sam's options for his various accounts: For IRA No.1 and IRA No.2, Sam may either distribute the amount from each IRA or total the amount and distribute it from one IRA. For 403(b) No.1 and 403(b) No.2, Sam may either distribute the amount from each 403(b) account or total the amount and distribute it from one 403(b) account. The amount of $10,000 must be distributed from the profit sharing plan account and the amount of $4,500 must be distributed from the 401(k) account. These amounts cannot be combined.

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.

Death and Divorce Do Not Affect Current Year's Calculation
If your were married on Jan 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 in Appendix C" of IRS Publication 590. Any new beneficiaries are taken into consideration for the following year's calculation.

Family-Attribution Rule
In the part 1, we mentioned that an individual who owns more than 5% of a business is not allowed to delay beginning the RMD beyond Apr 1 of the year following the year he or she reaches age 70.5, 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 is attributed to them. This means that they too are considered owners and are subject to the same deadline as you.

IRA Custodian Reporting Requirement
Each year the custodian/trustee of your Traditional IRA, SEP and/or SIMPLE IRA must send you a notification of your RMD. This notification must be sent to you by Jan 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 at your request. Beginning 2004, the custodian/trustee must also inform you that he or she will notify the IRS about your RMD requirement. This notification to the IRS, which is due in May of the year for which the RMD applies, will not include the amount of your RMD.

Conclusion
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.

by Denise Appleby (Contact Author | Biography)

Denise Appleby is a retirement plans consultant, freelance writer and editor. Before starting her own business, Appleby Retirement Consulting, Denise worked for Pershing LLC for almost 10 years. While at Pershing, Denise rose to the rank of vice president, and held many positions including retirement plans product manager, manager of the retirement plans technical assistance group and retirement plans training manager. Appleby Retirement Consulting provides technical assistance to financial institutions and financial professionals; content for newsletters, websites and magazines; and technical editing services for books and other retirement plans material. Denise holds several retirement professional designations.