FIVE RMD FACTS EVERY IRA OWNER SHOULD KNOW

If you have an IRA and you are approaching retirement age, you have probably heard the term “required minimum distribution” (RMD). But do you know the details of how the rules work and what they mean for you? Here are five facts about RMDs that every IRA owner should know.

1. 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 73.

   If you are still working, that will not delay when you must take an RMD from any 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.

2. 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 73.

   This is the only time you will have beyond the calendar year to take your RMD. The deadline for taking your RMD for years after you reach age 73 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.

3. 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 traditional IRAs that you own. You can separately aggregate IRAs inherited from the same person. 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.

4. Your RMD is calculated by dividing your December 31 prior-year IRA balance by a life expectancy factor.

   The year-end 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 when it comes to using this table.

5. If you fail to take your RMD by the deadline there is 25% 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.