Required Minimum Distributions...How Hard Can They Be?

Apparently, Required Minimum Distributions (“RMDs”) are a lot harder than you would think.  A new survey from TD Ameritrade finds that only 38% of Americans actually know that RMDs are required from tax advantaged qualified retirement accounts, e.g. IRAs, 401ks.  And if we are to believe that the Baby Boomers are retiring at the rate of 10,000/day, it’s safe to say that this could become an issue in the not too distant future.

Not taking RMDs is a problem because the penalty for missing one is 50% of the amount that should have been with withdrawn, in addition to the income tax due!  If that seems like a pretty steep penalty, that’s because it is!  The good news is that these accounts are generally at financial institutions that are aware of the need to make the RMDs and notify the individual of the amount that needs to be withdrawn.  Nevertheless, this doesn’t necessarily always mean things go well
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For example, do you know when you MUST begin your first RMD?  The first one is due by April 1st of the year FOLLOWING the year in which you turn 70 1/2.  That’s all well and good, and many people (or at least some people) actually know this.  A problem can surface, however, if you wait until April 1st because delaying doesn’t mean you don’t need to take another distribution by December 31st of that same year.  Consequently, you could get two distributions in one year which could do some things to your tax bill that you would rather not happen.

Another common challenge folks face is when they have multiple tax advantaged accounts – IRAs, old 401k balances, etc.  Any idea how to calculate what is required there?  The math isn’t necessarily that hard, but the actual distributions can be tricky.  For instance, if you have multiple IRAs, you can take the total required distribution from 1 IRA or mix it up.  No problem as long as the total for the IRAs is distributed.  Does it work the same for 401ks?  Nope, it does not.  Each 401k account stands on its own.  How about 403b balances left with old employers.  Seems like they should be treated like 401ks, right?  Wrong.  Now we are back to the IRA method.  Don’t worry, if you get it wrong the penalty is only 50%!

There is some legislation that will be changing the RMD rules again if it gets passed this year, which seems like a real possibility.  Will the new rules make things less complicated?  Maybe…maybe not.  You should probably talk to a professional about this.  You should probably talk to me.
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Give me a call and let’s have conversation.
Pete Welsh aka 401kGuy