Required Minimum Distribution (RMD’s) from Retirement Plans; so simple it seems but so costly to make mistakes!
The deadline is fast approaching to withdraw your RMD’s from Retirement Plans. Here are some simple rules to avoid the costly 50% excise penalty tax on insufficient RMD’s.
For all plans but Roth IRA’s, 403(b)’s and 401(k)’s where the employee is still working and less than a 5% owner (in the case of 401(k)’s) an RMD must be taken starting at age 73.
One rule involves the ability to aggregate RMD’s from similar plans and take the entire RMD from one plan. Here are the simple facts:
- Only like plans can be aggregated
- IRA’s; includes traditional IRA’s, SIMPLES and SEPS. You calculate each one separately and add together the amounts and take that amount from one of them.
- Roth IRA’s; no RMD’s required.
- 403(b) plans; can be aggregated with other 403(b) plans and taken from one.
- Employer Plans; 401(k), 457(b) or other plans must calculate the RMD for each plan and take it from that specific plan.
- Roth 401(k)’s – a little known rule is that if you’re a 5% or greater owner in a Roth 401(k), you have to start taking RMD’s at age 73; unlike a Roth IRA where you never have to. This begs the question of why not roll the Roth 401(k) into a Roth IRA? Planning opportunity. This will end in tax year 2024.
- Inherited IRA’s; can be aggregated as long as they are from the same deceased individual and you use the same life expectancy factor.
- Also, RMD’s must be taken and have whatever tax is due on them paid and cannot be rolled over to another qualified plan. In general, with only a few exceptions, only spouses can use “stretch” IRA’s to take life expectancy distributions. Other beneficiaries have to empty the inherited IRA out in 10 years.
Finally, if you do somehow miss an RMD you can file Form 5329 with the IRS and if there is a reasonable cause for the mistake, the IRS usually waives the penalty. The penalty has been reduced from 50% to 25% as of 2023.
This complexity and chance for error is another good reason to consolidate IRA's and other qualified plans to simplify! We have notified all of our clients of any RMD’s they need to take that we are aware of but please contact me as soon as possible if you have any questions about your RMD for this year.
Marc R. Gillespie, CLU, ChFC, CFS, MSM, CLF