Required Minimum Distribution (RMD)
Last trading day this year is December 29 and account balances of that date must be used in calculating RMD. For those individuals with an Individual Retirement Account (IRA) or a 401(k) and have reached their 70 ½ birthday, it is time to plan to take a required minimum distributions. The amount of the RMD is determined by your client’s age, life expectancy and account balances. Failure to take the RMD by April 1, 2018 will result in a 50 percent penalty plus a one percent per month interest for the amount that should have been taken when the Internal Revenue Service (IRS) catches up with them. The second RMD must be taken by December 31, 2018 with their new calculation using: age, life expectancy, account balances, and recalculated every year thereafter.
The RMDs are calculated for each IRA owned, but the owner is not required to take separate distributions from each account. The person would simply total up the RMDs of all IRAs and take it from one IRA. It may be best to take that amount out of the poorest performing IRA. Here is where the investment advisor provides some service to their client. Those clients with 403(b) accounts have the same option.
401(k) plans must take the RMD from each account. The same would apply to Roth 401(k) and other employer-sponsored plans. This rule does not apply to regular Roth IRAs since they were funded with after tax dollars. Those still working for their employer that sponsored the plan, RMD does not apply to them.
If the IRA owner has named their spouse as beneficiary, the spouse can roll it over into their own IRA and take distribution based on their RMD. In many cases, this benefits the younger spouse.
If the IRA owner has named their child as beneficiary, the child has two choices: continue to hold the inherited account, or liquidate it. If the child holds on to the account, RMDs would be based on their life expectancy. When the inherited account is liquidated, the amount taken is subject to income taxes in the year received. Liquidation can be spread over 5 years and without penalty. It is recommended that the client consult with their tax advisor for the best course of action.
Individuals under age 70 should consider planning steps to reduce their future RMDs. RMDs can result in social security benefits being taxed and increases in Medicare Part B premiums paid by high income taxpayers.