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Does an RMD Apply to Me?

When you reach the age of 70 ½ or older, the IRS requires you to distribute a portion of funds from your traditional IRA, SEP IRA, SIMPLE IRA, or 401(k) account to yourself personally. This is called a “Required Minimum Distribution,” or “RMD.” If you meet the age and account requirements, you must take a RMD from your IRA account once per calendar year. Once you take a distribution, the funds are subject to tax and are to be included on your personal tax return. Penalties incur if the RMD is taken after December 31st, so it is important to understand the rules and regulations. These can be overwhelming, so we’ve highlighted some of the important facts and confusion often found.

To begin, the basics of a RMD are listed below. If you meet these basic requirements, the IRS has a worksheet designed to help in the calculation.

Example

Once these basic requirements apply to you, the RMD is calculated off the total value of your account. An example of this is Roger, listed here.

Roger is 80 years old, and is required to take a RMD. He has a Traditional IRA account, which he has used to invest in real estate and an unsecured note. The total value of his account at the end of last year was: $175,000. According to IRS rules and regulations, Roger is required to take a RMD of $9,358.29 by the end of this calendar year.

Having covered some of the basics, the highlights of the often misconstrued information are clarified below.

True

The Required Minimum Distribution can be taken from one IRA to satisfy the RMD for all IRA accounts.
The RMD will need to be calculated for each IRA account you have, but you can combine these and satisfy the total from any one account. The only catch to this rule is that you cannot combine the RMD of a 401(k) and IRA account; only IRA to IRA, or 401(k) to 401(k).

Roth accounts are NOT required to take a RMD.
Roth IRA accounts are exempt from RMDs, because there is no tax due when you take a distribution from a Roth IRA. Since the government does not receive any tax revenue, they do not require a distribution from this account.

Failure to take your RMD results in 50% Excise Tax on the total due.
For example, if you are required to take $10,000 for your RMD but failed to do so, you will be subject to a $5,000 excise penalty.

401(k) RMD can be delayed for as long as you are working for that employer.
As long as you are employed by the person/ company/ business your current 401(k) account is with, you can delay taking your RMD for as long as you are still working for that employer. This only applies to current employer 401(k) accounts however; it does not apply to former 401(k) accounts.

False

“My RMD can be taken until April 15th (tax return deadline) of the following year.”
NO! All Required Minimum Distributions must be taken by December 31st of that year. Contributions can be made until the following tax return deadline, but any RMD is due by the end of the year.

“A RMD must be taken as cash.”
Although a cash distribution is the easiest method, an in-kind distribution also satisfies the requirements. “In-Kind” may be stock, real estate, precious metals, or other assets in your account that you either do not want to sell, or cannot sell. This will require extra paperwork and time to process, so if you plan to take your RMD in-kind, be sure to allow extra processing time.

“The same rules apply to Roth IRA’s and Roth 401(k) accounts.”
False. These two accounts are similar in that they are both tax-free accounts, however the RMD requirements differ. Roth IRA accounts are exempt from the RMD rules, while Roth 401(k) accounts are required to take an RMD. A good way to forgo this rule is to roll your Roth 401(k) to a Roth IRA account. If you keep the account as a Roth 401(k), you will be required to start taking your RMD at the age of 70 ½, which will not be subject to tax but you will be removing funds from your tax-free account.

As the custodian of your account, Cama will notify the qualifying accounts of RMD dates and calculated RMD amounts based off the information we have. To ensure correct transactions, it is encouraged that clients know and understand the RMD process and values. Once the IRS requirements are understood, the same process will likely occur each year when making your calculations.

More Information

For further information regarding Required Minimum Distributions and the IRS requirements, please visit https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Required-Minimum-Distributions-(RMDs)

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