You’ve reached age 70 ½ and you know that you must take any required minimum distributions (RMDs) by April 1st of the year following this milestone. Better yet, perhaps you are in your early or mid-sixties, and want to plan ahead to get the maximum benefit of these rules. There are some common mistakes that are made. It may be best to do a detailed review of your situation to make sure all the requirements have been met. Remember that you can always take more than your RMD, but not less. Forgetting to take your RMD when required can result in a 50% penalty of the RMD amount from the IRS.
Here are some of the common mistakes that people make.
- Not knowing how to group accounts for calculating your required minimum calculation. While each account should be calculated separately, IRA accounts and 403(b) accounts can be grouped, and the required amount can be taken out of the account(s) of your choice. However, all other company plans must be distributed from each plan separately. Make sure you have a complete inventory of every IRA and company plan, along with the account balance from December 31st of the year prior to the distribution year.
- Using the wrong table. If your sole beneficiary spouse is more than 10 years younger than you, you can use the Joint Life Table to calculate a smaller RMD than you would get using the Uniform Distribution Table.
- If you delay your first RMD to the subsequent year, you must still use the balance of the accounts on December 31st of the year prior to the year you turn 70 ½. If you turn age 70 ½ during the second half of the year (July through December), use age 71 to calculate the RMD instead of age 70.
- Not understanding the “still working” exception to RMDs. This exception does not apply to IRAs or company plans for companies that you no longer work for. You also cannot use this exception for a company plan if you are a more than 5% owner (including family ownership).
- Not knowing that you can take RMDs in kind. For instance, you can distribute company shares for the value of your RMD to an after-tax account without having to cash out your stock.
- Not knowing that if you turned 70 ½ this year, you can take part of your RMD this year, and the remainder by April 1st of the next year.
- Not knowing that you can transfer your RMD directly to a charity and not have to claim it as taxable income.
The rules can be quite complicated, and it is easy for you or your custodian to make a mistake. Consider doing a review of your situation to make sure it is handled correctly.