Have you turned 701⁄2? Know the rules for RMD
It’s a milestone age for your retirement account
Did you turn 701⁄2 last year? While it’s not a classic milestone, like 18, 21 or 65, it comes with its own rewards and responsibilities.
According to the IRS, the year you turn 701⁄2 is when you must begin withdrawing funds from a retirement account, even if you don’t need the money yet. This withdrawal is called a required minimum distribution, or RMD.
If you somehow forgot to make that withdrawal last year, don’t worry … yet. You still have until April 1, 2018, to take out the money.
Which plans?
The RMD rules apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The withdrawal rules also apply to Roth 401(k) accounts. Also falling under the rules are traditional IRAs and IRA-based plans such as SEPs, SARSEPs and SIMPLE IRAs.
Roth IRAs are subject to RMDs after the death of the owner, with a 50% penalty if such distributions are not made. For more, read: www.irs.gov/ retirement-plans/retirement-plansfaqs-regarding-required-minimumdistributions#2.
Use the right balance
The withdrawal you must take by April 1 for the year 2017 is based on your retirement account balance as of Dec. 31, 2016, not the Dec. 31, 2017, balance. Your 2018 RMD is based on the Dec. 31, 2017, balance, says Natalie Choate, author of Life and Death Planning for Retirement Benefits.
If you hurry, you can still use what’s called a qualified charitable distribution, or QCD, to ease your taxes on your RMD. Your withdrawal is normally taxed as ordinary income, but is not taxable if you donate it — in full or part — to a qualified charity. Choate, who also practices law with Nutter McClennen & Fish, recommends transferring the funds directly from the IRA to a qualifying charity.
Take two
If you missed your 2017 withdrawal last year, you will have to take two RMDs in 2018, says Beverly DeVeny, director of retirement education at Ed Slott and Company. The first RMD you take by April 1, 2018, applies to 2017, and the second, which you must take by the end of 2018, applies to 2018, she says. Note, too, that both will be taxable in 2018.
Don’t miss the deadline
According to the IRS, if an account owner fails to withdrawal, doesn’t withdraw the full amount of the RMD, or misses a deadline, the amount not withdrawn is taxed at 50%.
“This penalty applies to the RMD shortfall,” says Denise Appleby, the CEO of Appleby Retirement Consulting and RetirementDictionary.com. “Therefore, if only a portion was taken, the penalty is only on the balance.”
The IRS will, however, waive the penalty if the deadline was missed due to “reasonable cause,” Appleby says.
According to the IRS, the account owner should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with his or her federal tax return for the year in which the full amount of the RMD was not taken.
Appleby also says IRS Form 5329 must be filed to report the penalty, even if a waiver is being requested. “And, if a waiver is being requested, the penalty should not be paid, unless the IRS responds to say they have denied the waiver request.”
Got questions about money? Email Bob at rpowell@allthingsretirement.com.