6 Important Retirement Plan RMD Rules

The IRS requires that you begin receiving required minimum distributions (RMD) in the year you reach age 70½. That sounds simple enough, but unfortunately, calculating these distributions is not always easy, as there are a number of factors to consider. While a tax professional can certainly help you with this, it's a good idea to get to know the requirements that must be met in order to avoid IRS penalties. Here's a look at some of the key rules that affect RMD calculations.

Amounts representing RMDs must not be rolled over to an IRA or other eligible retirement plan and cannot be converted to a Roth IRA. If you roll over or convert your RMD, it will be treated as an excess contribution, which must be removed from the account by a certain time in order to avoid taxes and penalties. The first distribution from your IRA for any year an RMD is due is considered to be part of your RMD for that year and is therefore not rollover eligible.

"Be careful if you decide to roll an IRA over after the age of 70½. Take your distribution first!" says Patrick Traverse, founder of MoneyCoach, Charleston, S.C. (For background reading, see Preparing for Retirement Plan RMD Season.)

Example
Mary reached age 70½ in 2017. Her RMD for 2017 is $15,000. Since 2017 is the first RMD year for Mary, she may wait until April 1, 2018 to distribute her RMD for 2017. During 2017, Mary received a distribution of $7,000 from her IRA. Even though Mary is not required to take her 2017 RMD until April 1, 2018, the amount she received in 2017 cannot be rolled over as it is attributed to her RMD for 2017: Any amount distributed during a year for which an RMD is due is considered to be part of the RMD until the full RMD amount has been distributed. If Mary had taken a distribution of $17,000, the amount that is in excess of the RMD amount ($2,000) is rollover eligible because the RMD for the year would already have been satisfied.

If you participate in more than one qualified plan, your RMD for each plan must be determined separately, and each applicable amount must be distributed from the respective plan. RMD amounts for qualified plans cannot be distributed from IRAs and vice versa. However, if you own multiple IRAs or multiple 403(b) amounts, you may aggregate the RMD for all similar plans (Traditional IRAs or 403(b)s) and then take the amount from one account of each type of plan.

Example
Sam, a 75-year-old retiree, has two Traditional IRAs and two 403(b) accounts. Sam also has assets in a profit-sharing plan and a 401(k) plan with past employers. The RMD amount for each of Sam's retirement accounts is the following:

IRA No. 1 – $15,000

IRA No. 2 – $8,000

403(b) No. 1 – $6,000

403(b) No. 2 – $4,500

Profit-sharing account – $10,000

401(k) account – $12,000

Here are Sam's options for his various accounts:

• For IRA No. 1 and IRA No. 2, Sam may either distribute each amount from each IRA account, total the amounts and distribute it from one IRA, or take any portion of the combined amounts from one of the IRA accounts.
• For 403(b) No. 1 and 403(b) No. 2, Sam may either distribute the amount from each 403(b) account, total the amount and distribute it from one 403(b) account, or take any portion of the combined amounts from one of the 403(b) accounts.
• The amount of $10,000 must be distributed from the profit-sharing plan account and the amount of $12,000 must be distributed from the 401(k) account. These amounts cannot be combined.

Prior to 2002, many IRA custodians would not allow an IRA owner to transfer an RMD amount to another IRA custodian. The IRA owner would have been required either to distribute the RMD amount prior to the transfer or leave the RMD amount behind to be distributed by the applicable deadline. This is no longer required. As allowed by the final RMD regulations, you may transfer your entire IRA balance even if an RMD is due, provided you take the RMD from the receiving IRA by the applicable deadline.

If you were married on January 1 of the year for which the calculation is being done, you are, for RMD calculation purposes, treated as married for the entire year even if you divorce or your spouse dies later in that year. This means that if your spouse beneficiary is more than 10 years younger than you, you may still use the "Joint Life and Last Survivor Expectancy" Table II in Appendix B of IRS Publication 590-B. Any new beneficiaries are taken into consideration for the following year's calculation. (For more insight, read Life Expectancy: It's More Than Just a Number.)

"Upon divorce, RMDs and retirement assets in general can become very tricky, and can vary from state to state," says Dan Stewart, CFA®, president, Revere Asset Management, Inc., Dallas Texas. "And community property states would have different rules than other states. So competent council is important, especially to avoid or minimize taxes."

An individual who owns more than 5% of a business is not allowed to delay beginning the RMD for a non-IRA retirement plan beyond April 1 of the year following the year he or she reaches age 70½, even if the individual is still employed. If you own more than 5% of a business and your spouse and/or children are employed by the same business, your ownership may be attributed to them. This means that they, too, may be considered owners and could be subject to the same deadline as you.

Each year the custodians/trustees of your traditional IRA, SEP and/or SIMPLE IRA must send you an RMD notification as long as they held your IRA on December 31 of the preceding year. This notification must be sent to you by January 31 of the year for which the RMD applies. Some custodians will include a calculation of your RMD amount for the year, while others will inform you that an RMD is due and only offer to compute the amount upon your request.

If you know someone who has reached RMD age, be sure to tell him or her about the rules. Bear in mind that the rules discussed here are certainly not exhaustive. Individuals should check with their tax professionals to ensure that RMD calculations and distributions meet regulatory requirements.