By Sarah Brenner, IRA Technical Expert
Follow Us on Twitter: @theslottreport
If you have an IRA and you are approaching retirement age, or if you are already in retirement, you are most likely familiar with the term “required minimum distribution (RMD).” But do you know how the rules work and what they mean for you as an IRA owner? Here are 10 facts about RMDs that every IRA owner should know.
- If you have a traditional IRA (including a SEP or SIMPLE IRA), you must take an RMD for each year beginning for the year you reach age 70 ½. If your birthday is between January and June, the year of your 70th birthday will the first year for which you are required to take RMD. If your birthday is between July and December, the first year for which you will be required to take an RMD is the year of your 71st birthday. If you are still working, that will not delay when you must take an RMD from any IRA.
- The deadline for taking your first RMD is your required beginning date, which is April 1 of the year following the year you reach age 70 ½. This is the only year that you will have beyond the calendar year to take your RMD for the year.
- The deadline for taking your RMD for years after you reach age 70 ½ is December 31. If you delayed taking your first RMD until April 1 of the following year, you will then need to take another RMD by December 31 to satisfy the requirement for the second year.
- RMDS are calculated separately for each IRA but then may be aggregated and the total amount taken from one IRA. You may not take the RMD for an IRA from your company plan or from your Roth IRA. You can aggregate IRAs that you own. You can separately aggregate IRAs inherited from the same person.
- The IRA custodian is required to send you a statement by January 31 for each year you are required to take an RMD. This statement will either provide you with your RMD amount or offer to calculate it upon request. The statement will also tell you the deadline for taking your RMD and remind you that the custodian will be reporting to the IRS that an RMD is required.
- The IRA custodian will also be reporting to the IRS on Form 5498 that you are required to take an RMD. This is done by checking a box on the previous year’s Form 5498. You will be sent a copy of this form or a substitute statement with this information.
- Your RMD is calculated by dividing your December 31 prior year IRA balance by a life expectancy factor. The balance may need to be adjusted in rare circumstances like rollovers or transfers that are outstanding on December 31 of the prior year. Life expectancy is determined using the Uniform Lifetime Table unless the sole beneficiary of your IRA for the entire year is your spouse who is more than ten years younger than you. If that is the case, you would use the Joint Life Expectancy Table. Special rules apply for death and divorce.
- Your RMD may not be rolled over to another IRA or converted to a Roth IRA. Once you have satisfied your RMD for the year for your IRA, you may then roll over or convert the IRA.
- If you have a Roth IRA, no RMDs are required during your lifetime. Converting your IRA to Roth IRA would result in no further RMDs being required in your lifetime.
- If you fail to take your RMD by the deadline there is 50% penalty on the amount of the shortfall. If you miss your RMD for the year, you should take it as soon as possible. You should consult with your tax advisor about filing Form 5329 and asking for a waiver of the penalty. The IRS will waive the penalty for good cause.