The facts about required minimum distributions

November 21, 2012 

I received a call from a local retiree last week, and he wanted to know what he should do with his required minimum distribution, or RMD. He was wondering if he could roll his RMD over into another tax-deferred account. Last year, I received a call from a woman who was frantic that her father didn’t take his RMD and now owed the IRS $5,000. This brief article will cover the main points you need to know about RMD’s.

For those of you who are not familiar with this term, RMD’s are minimum amounts that a retirement plan account owner must withdraw annually starting with the year he reaches age 70½. RMD requirements apply to conventional IRAs, as well as to employer-based retirement plans. Account owners who are still working can generally skip this distribution from their employer-sponsored plan, but must take a distribution from their IRA.

The first RMD payment can be delayed until April 1 of the year following the year in which an account owner turns 70½, but then the next distribution will need to be taken by the end of that same year. There are no distribution requirements for Roth IRAs, but owners of inherited conventional and Roth IRA accounts (other than spouses) who don’t distribute the inherited IRA within five years after the original owner’s death must take annual distributions. For nonspouse beneficiaries, this creates a “stretch” IRA, as they are only taking RMDs based on their life expectancy and letting the rest of the account grow for their own retirement.

The amount of the distribution is based on the account value on Dec. 31 of the previous year, and a life expectancy factor that the IRS publishes. There are three life expectancy tables. The Joint and Last Survivor Table is used by an account owner whose sole beneficiary of the account is his or her spouse and he/she is more than 10 years younger than the account owner. The Uniform Lifetime Table is used by account owners whose spouse is not the sole beneficiary or whose spouse is not more than 10 years younger. The Single Life Expectancy Table is used by a beneficiary of an account. You can see these tables on the IRS website, www.irs.gov.

The RMD is calculated separately for each IRA that a person owns, but the total distribution can be taken from one or more accounts. Distributions are taxed at ordinary income tax rates, unless you have made after-tax contributions, in which case a portion of your withdrawal is tax-free.

What if you don’t take your RMD? The amount not withdrawn is taxed at 50 percent, so you don’t want to miss this. And, the answer to my caller’s question is no. You cannot transfer the RMD directly into another tax-deferred account. You must take the required distribution and pay the taxes.

Sherri Goss is vice president of Rosenberg Financial Group, Inc., with offices in Macon and Warner Robins. Contact her at 922-8100 or e-mail sherri@rfmoney.com.

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