October Focus -
A Primer on Required Minimum Distribution Calculations
Inaccurate calculations of the required minimum distribution (RMD) amount for an IRA can lead to the IRA owner or beneficiary owing the IRS an excess accumulation penalty of 50% of any RMD shortfall. As such, IRA owners should familiarize themselves with the calculation requirements and double check any calculations provided by their financial institutions.
Owners of Traditional IRAs, SEP IRAs and SIMPLE IRAs, (traditional IRAs) are required to begin withdrawing annual RMD amounts from their traditional IRAs beginning the year they reach age 70 ½. The required beginning date (RBD), which is the deadline by which the first RMD amount must be withdrawn from the IRA, is April 1 of the year that follows the year in which the IRA owner reaches age 70 ½. RMD amounts for other years must be withdrawn by December 31 of the year for which they are due. Beneficiaries may also need to withdraw RMD amounts from inherited IRAs.
The RMD requirements do not apply to Roth IRA owners, but they do apply to Roth IRA beneficiaries.
Who is Responsible for Calculating RMD Amounts?
Financial institutions that serve as custodians or trustees for IRAs are required to notify IRA owners of their RMD obligations, providing the financial institution held the IRA as of December 31 of the preceding year and the IRA owner was alive at the beginning of the year. The notification should either include the calculated RMD amount, or an offer to calculate the RMD upon request. This requirement does not apply to Roth IRAs or inherited IRAs.
How the RMD is Calculated
The RMD for an IRA is calculated by dividing the fair market value (FMV) as of the previous year end by the applicable distribution period. For instance, if the RMD is being calculated for 2008, the FMV for December 31, 2007 must be divided by the applicable distribution period for 2008.
Determining the Distribution Period
For IRA owners, the distribution period is determined by using the IRA owner's age and the age of a beneficiary assumed to be ten years younger than the IRA owner. For instance, if the IRA owner is 75 years old, the distribution period would be 22.9 (See Appendix C.
Uniform Lifetime Table
in IRS Publication 590 at
www.irs.gov). An exception applies if the IRA owner's spouse is the sole primary beneficiary of the IRA and is more than ten years his junior. Under this exception, the distribution period would be determined by using the Joint
Life and Last Survivor Expectancy Table. As such, if the 75-year old IRA owner's spouse was 49 years old and she was the sole primary beneficiary of his IRA, the distribution period would be 35.6 enabling the account owner to take out a smaller amount annually.
For beneficiaries, the distribution period is determined by using the
Single Life Expectancy
Table. If the IRA owner died before the RBD, the beneficiary's age is used. If the IRA owner died on or after the RBD, the longer of
the decedent's remaining life expectancy or
the beneficiary's life expectancy, is used. If there are multiple beneficiaries the age of the oldest beneficiary is used, unless the assets are split into separate accounts by December 31 of the year that follows the year in which the IRA owner dies. If the accounts are timely split, each beneficiary can use his own life expectancy.
If the beneficiary is a non-person, the assets must be distributed within five years of the IRA owner's death if death occurs before the RBD or over the remaining life expectancy of the IRA owner if death occurs on or after the RBD.
Should RMD Calculations be Double Checked?
When calculating RMD amounts, financial institutions typically use the information available to them on their accounting systems. However, the calculation may be incorrect because the FMV is not adjusted for rollovers and transfers that occur across year end and recharacterized conversions that occur after December 31. These transactions would result in the funds leaving the IRA before January 1 and being redeposited after December 31, causing the FMV on the custodian's books to be understated. These transactions must be added back in to the December 31st
account balance before calculating the RMD for the year.
Financial institutions are allowed to use the Uniform Lifetime Table to calculate the RMD for the year, regardless of who is the beneficiary. However, If the account owner qualifies to use the Joint Life Table, then he will need to do his own calculation.
Failure to withdraw the RMD amount will result in the IRA owner owing the IRS an excess accumulation penalty of 50% of the shortfall. Even in instances where the calculations are provided by the custodian, missing or inaccurate information can result in inaccurate calculations. The ultimate responsibility for ensuring the RMD is satisfied rests with the IRA owner. IRA owners should therefore double check calculations by working with a tax or financial professional proficient in the area of RMDs, or use reliably accurate software such as those provided by
Detailed information on required minimum distributions from IRAs is available in IRS Publication 590, available at
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An individual converted his traditional IRA to a Roth IRA early this year. The returns on investments were doing well, until recently when market losses resulted in the value of the account being reduced to less than 50% of the value of the conversion. He does not want to pay taxes on amounts that he no longer owns. What should he do?
The individual can recharacterize the conversion to a traditional IRA. A recharacterization is moving the current value of the conversion to a traditional IRA. The current value would be the value of the conversion plus any earnings or minus any losses. If the entire Roth IRA balance came from the conversion (+/- earnings/losses), recharacterizing the entire balance will suffice. If there are other conversions, transfers and/or Roth IRA contributions in the Roth IRA, a special formula must be used to compute the earnings/losses attributed to the conversion. The formula is available in IRS Publication 590, which is available at
News, Rulings and Other Updates
PLR 200839039 :
IRS Gives Extension to Complete Recharacterization of Roth IRA Conversion:
The deadline for filing the taxpayer's tax return for the year in question was
August 15, 2005. On the advice of his tax preparer, he converted a traditional IRA to a Roth IRA. However, his modified adjusted gross income (MAGI) exceeded the $100,000 limit. His tax preparer provided an affidavit to the IRS, explaining that the conversion was done based on his (the tax preparer's) advice, and that he was unaware of the $100,000 MAGI limit when he advised the taxpayer to proceed with the
conversion. Despite the fact that the deadline for completing a recharacterization would have been October 15, 2005, the IRS gave the taxpayer approval
to complete the recharacterization.
IRS Says 'Make-Up" Distribution does not Modify SEPP:
Taxpayer was taking substantially equal periodic payments (SEPP) from his IRA. His broker sent him two distribution request forms, which he completed, indicating his request for SEPP payments, signed and returned to the broker. Due to a misunderstanding by the financial institution, only one form was processed. The IRS ruled that the form that was overlooked could be processed in the next year and would not cause a modification of the SEPP, which means the SEPP requirements would not be violated.
October's Retirement Planning Tip
The recent weeks have proven to be a roller coaster period for investors, as many have seen their IRA portfolios fluctuate in value - and in most cases experienced bigger losses than gains. These individuals are faced with the dilemma of whether to stay the course and weather the stock-market storm, or dump their investments. As self-professed experts
offer different and conflicting advice, IRA owners often become confused about which path is 'right' for them. The right answer is that there is no 'one-size-fits'-all solution. An IRA owner should consult with his financial advisor to create a customized solution that is suitable for him. These recent events underscore the need for competent financial advisors. Financial advisors should seize the opportunity to meet with clients and remind them that they are concerned not only about their portfolios, but also other equally important areas of their retirement, financial, and estate planning.
Highlights from Ed Slott's IRA Advisor Newsletter - October 2008 Issue
The October 2008 issue of Ed Slott's IRA Advisor is now available online. The areas covered include the following:
URGENT--- Reverse 2007 Roth IRA Conversion Now!
Values have declined. Read this month's issue right NOW for this and other critical October IRA deadlines that can save your clients money.
October IRA Strategies for Declining Markets
Roth IRA Recharacterizations
Should You Recharacterize?
Roth Recharacterization Rules
How Soon Can You Reconvert?
Roth Conversion (and Reconversion) Strategy I
Roth Conversion (and Reconversion) Strategy II
Advisor Action Plan
Deadline for Removing Excess IRA Contributions
What Causes Excess IRA Contributions?
Correcting an Excess Contribution
Missed the Deadline?
Carrying Forward the Excess Contribution
Advisor Action Plan
Don't Miss the October 31st Trust Documentation Deadline
The October 31st Trust Deadline Rule
Trust Deadline Q & As
Be sure to review the October issue and post your questions on our message board at
=, where some of the best experts in the retirement field gather to discuss technical issues.
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