Cutter Family Finances: What You Need to Know About Required Minimum Distributions
By: Jeffrey Cutter, December 26, 2013
Last Saturday night I attended my first Highfield Hall holiday party with Jill, my colleague Susan and her husband, Seth. The folks who put on the party really did an amazing job. Everything was exquisitely decorated, the music was great, and Chef Roland put out a spread that was to die for. What a beautiful night we had, celebrated in a magnificent hall, among some wonderful people.
I was in line to grab some “holiday cheer” when a very nice guy tapped me on my shoulder. I don’t remember his name, so I will refer to him as Andy. Andy said he is an Enterprise “junkie” and he learns a lot about finance by reading this column. He asked me if I could write a column to help him understand Required Minimum Distributions (RMD), so he can figure out whether he should take his first one this year or next. Andy told me that he turned 70 1/2 in November. He knows that he has to begin taking RMDs from his tax-deferred IRAs and wanted to know if he should wait until next year.
So, Andy, here you go and thanks for the “holiday cheer.”
First, let’s understand who needs to take an RMD. Generally, folks must begin taking their RMDs by April 1 of the year after they reach age 70 1/2. So technically, Andy is not required to take his RMD until next April. However, if he makes that choice, then he would need to take two RMDs in the same calendar year because his second RMD would need to be taken by the end of 2014. So, Andy should estimate his projected taxable income for 2014 because by taking two RMDs, he may be pushed into a higher tax bracket, thereby resulting in an unfavorable tax consequence. If that is the case, Andy may want to take one RMD this year and another by the end of 2014.
Another factor to consider when taking an RMD is how to take a distribution. An individual’s Required Minimum Distribution from his or her IRAs, including SEP and SIMPLE IRAs, should be calculated on each IRA, but then those figures can be added together and the entire distribution can be taken from any one or combination of IRA accounts. There are some potential traps here that you want to avoid. You cannot combine the RMDs for spouses. Each spouse must take their RMD from their own IRA account(s). You cannot combine the RMDs from owned IRA accounts with RMDs from inherited accounts. However, you can combine the RMDs from inherited accounts when they are inherited from the same IRA account owner.
Generally, distributions from employer plans must be calculated on each plan and withdrawn separately from each one. Employer plans cannot be aggregated—with one exception; 403(b) accounts can be aggregated using the same rules for IRAs as noted above. The combined total can be taken from any one or combination of multiple 403(b) accounts.
Under no circumstances can an RMD from one type of plan be satisfied with a distribution from a different type of plan. A 403(b) RMD cannot come out of an IRA, likewise an IRA RMD cannot come out of a 401(k), et cetera.
There are no RMDs for Roth IRA account owners, so there are no aggregation rules. However, an inherited Roth IRA does have a Required Minimum Distribution. Such RMDs can be aggregated with other IRAs following the same IRA rules as above.
The amount of an RMD is usually based on the Uniform Life Expectancy table. This table can be found either on my website or on the IRS’s website. The amount is usually based upon the December 31 value of an account and is calculated by dividing the prior year-end account value by the applicable life expectancy. If, however, an individual has a spouse who is 10 years younger, a different table is used.
A point of caution on your RMD; there is a 50 percent penalty on the amount not taken if you do not take your full RMD, and if you take the RMD out of the wrong type of account, you are treated as though you did not take the RMD at all. If you have questions calculating your RMDs or concerns about taking distributions from a retirement plan, I do suggest you seek guidance from an IRA specialist.
So, Andy, there you have it. I hope this helps you and everyone else deciding by year-end how and when to take your RMD.
Have a wonderful holiday. See you next week.
Be vigilant and stay alert, because you deserve more.
Jeffrey Cutter, CPA, PFS is the managing partner from Cutter Financial Group, LLC (www.cutterfinancialgroup.com) which provides private wealth and investment management. He can be reached at firstname.lastname@example.org. Investment advice is offered by Horter Investment Management, LLC, a registered investment adviser. Insurance and annuity products are sold separately through Cutter Financial.
Investment advice is offered by Horter Investment Management, LLC, a registered investment adviser. Insurance and annuity products are sold separately through Cutter Financial. Securities transactions for Horter Investment Management clients are placed through Pershing Advisor Solutions, Trust Company of America, Jefferson National Monument Advisor, Fidelity, Security Benefit Life and FC Stone. 1. http://tinyurl.com/nwvbep4