Generally, retirement account owners who are at least age 70.5 must withdraw required minimum distributions (RMD) from their retirement accounts by Dec 31. In the first RMD year, individuals may be able to defer the RMD to the next year until the required beginning date. Those who withdraw less than the RMD amount by the deadline will owe the IRS an excise tax of 50% of the shortfall. As such, individuals must take care to ensure they withdraw a sufficient amount to meet their RMD. This means avoiding some pitfalls when calculating the RMD for a retirement account.

Use the Correct Fair Market Value
The RMD for a year is determined by dividing the previous year-end's fair market value (FMV) by the applicable distribution period. (For more on how to calculate your RMD, see Tis The Season For Required Minimum Distributions.) Your IRA custodian usually provides a report of your FMV by Jan 31 of the following year. However, if in the current year you recharacterized a conversion for the previous year or rolled over a distribution from the previous year, your custodian may not be aware of these transactions and may not have included those amounts in your FMV. You must therefore figure out your RMD with these current-year recharacterizations and conversions. Let's look at the following examples:

Example 1
Michael reached age 74 in 2013. In March 2013, he contacted his IRA custodian for assistance with calculating his RMD. The custodian used Michael\'s previous year-end FMV of $100,000 and his distribution period of 23.8. According to the custodian\'s calculation, Michael\'s RMD for 2013 is $4,202. However, in September 2013 , he decided to recharacterize $200,000 he converted to his Traditional IRA in 2012. Michael is required to adjust his previous year-end FMV by the recharacterized amount. This would make his RMD approximately $12,605 - a $8,403 difference. If Michael fails to withdraw the additional $8,403 from his Traditional IRA by December 31, 2013, he will owe the IRS an excise tax (excess accumulation penalty) of $4,201.
Example 2
Jane reached age 73 in 2013. She contacted her IRA custodian in Jan 2013 for assistance with calculating her RMD amount. The custodian used Jane\'s previous year-end FMV of $50,000 and her distribution period of 24.7 to calculate the RMD amount of $2,024. In February 2013, Jane decided to roll over the $150,000 that she withdrew from the IRA in December 2012. Jane\'s RMD must be refigured by including this $150,000 in the FMV, resulting in a RMD difference of $6,073 ($8,907 -$2,024). If Jane fails to withdraw the additional amount by December 31, 2013, she will owe the IRS an excise tax of $3,037.

Combining RMDs Must Be Limited to the Same Type of Retirement Plan
If you have multiple retirement accounts, you are allowed to combine and withdraw the multiple RMDs from one retirement account; however, only RMDs from certain types of retirement plans can be combined. The following combinations are permitted:

  • If you have multiple Traditional IRAs, you may calculate each IRA's RMD, combine these RMDs, and withdraw the total amount from one Traditional IRA.
  • If you have multiple 403(b) accounts, you may calculate each 403(b)'s RMD, combine all these RMD amounts, and withdraw the total amount from one 403(b).
  • If you have multiple inherited/beneficiary IRAs from the same decedent, you may choose to combine life-expectancy distributions for those inherited IRAs and withdraw the total from one inherited IRA.

You may not combine the RMD amount for different types of retirement plans. The following are examples of combinations that are not allowed:

  • You may not combine the RMDs for multiple qualified plans. Each RMD must be withdrawn from the respective qualified plan.
  • You may not combine RMD amounts for different types of plans. For instance, an RMD amount for a 403(b) account may not be withdrawn from a Traditional IRA or vice versa, and the RMD for a 403(b) account may not be withdrawn from a qualified plan.
  • RMD amounts for inherited/beneficiary IRAs may not be withdrawn from Traditional IRAs that you own.
Example
Sam inherited an IRA from his Aunt Suzie. The RMD amount for the inherited IRA is $6,000. Sam has his own IRA that he funded himself with regular and rollover contributions, and this year the RMD amount for his own IRA is $10,000. Sam cannot combine the two RMD amounts and withdraw from only one. Each RMD must be withdrawn from its respective account.

If you have multiple inherited/beneficiary IRAs from different decedents, you may not combine distributions for those inherited IRAs.

Should you inadvertently combine RMD amounts for different types of retirement plans, an RMD shortfall will result for the retirement plan from which you withdrew no RMD. For instance, say the RMD for your qualified plan is $10,000 and the RMD for your Traditional IRA is $5,000. If you withdraw $15,000 from the Traditional IRA and make no withdrawal from the qualified plan account, you will not have satisfied the RMD for your qualified plan account and will owe the IRS an excise tax amount of $5,000 (50% of the shortfall).

Conclusion
If you fail to withdraw your RMD amount, you could end up owing the IRS large excise tax amounts. Taking a few additional steps can help you to avoid these taxes. Before calculating your RMD, check to see if you made rollover contributions after the year-end. Additionally, if you decide to recharacterize conversions after the year-end, be sure to refigure your RMD amount. Most importantly, be sure to inform your custodian of these adjustments.

Related Articles
  1. Retirement

    How a 401(k) Works After Retirement

    Find out how your 401(k) works after you retire, including when you are required to begin taking distributions and the tax impact of your withdrawals.
  2. Retirement

    What Happens to a 401(k) After You Leave Your Job?

    Find out what happens to your 401(k) after you leave your job. Learn about your five primary options, including cashing out and rolling over to a new plan.
  3. Retirement

    Is it Safe for Retirees to Invest in Technology?

    Tech stocks are volatile creatures, but there are ways even risk-adverse retirees can reap rewards from them. Here are some strategies.
  4. Retirement

    Roth IRAs Tutorial

    This comprehensive guide goes through what a Roth IRA is and how to set one up, contribute to it and withdraw from it.
  5. Retirement

    Retirees: How to Survive When Interest Rates Drop

    Low interest rates are a portfolio killer if you're living off of investment income. Some strategies for dealing.
  6. Insurance

    Beware the Sneaky Math of Universal Life Insurance

    Universal life insurance's cash value can be a cash cow – if there's any left. Read on to see if it'll work as an income source after you've retired.
  7. Term

    How Traditional IRAs Work

    A traditional IRA is a tax-advantaged retirement account that includes stocks, bonds, mutual funds and other investments.
  8. Taxes

    Why People Renounce Their U.S Citizenship

    This year, the highest number of Americans ever took the irrevocable step of giving up their citizenship. Here's why.
  9. Retirement

    5 Reasons Millennials Lead in Saving for Retirement

    Say what you want to about millennials but the one thing they are doing better than any other generation is saving for retirement. Here's why.
  10. Retirement

    Shopping the New Retirement Products

    There are more options than ever for retirement portfolios these days. Choosing the right product comes down to your needs, time and management style.
RELATED FAQS
  1. What does U.S. law say about contingent beneficiaries?

    In the United States, posthumous asset transfers only require the listing of a primary beneficiary. Contingent beneficiaries ... Read Full Answer >>
  2. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  3. What is the maximum I can receive from my Social Security retirement benefit?

    The maximum monthly Social Security benefit payment for a person retiring in 2016 at full retirement age is $2,639. However, ... Read Full Answer >>
  4. How do I file taxes for income from foreign sources?

    If you are a U.S. citizen or resident alien, your income (except for amounts exempt under federal law), including that which ... Read Full Answer >>
  5. Are target-date retirement funds good investments?

    The main benefit of target-date retirement funds is convenience. If you really don't want to bother with your retirement ... Read Full Answer >>
  6. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
Trading Center