If you’re age 70½ or older, you must take required minimum distributions (RMDs) from your IRA. Similarly, you must take RMDs from qualified retirement plans at this age (although there are some exceptions that your plan administrator can explain). And if you inherit an IRA or retirement plan benefits, RMDs must also begin within certain deadlines, regardless of your age.
If you fail to take RMDs, you may be subject to a 50 percent early distribution penalty; the penalty is applied to the amount you should have taken.
You’ll definitely want to avoid making a costly RMD mistake like that. Here are six smart tactics that will help you take the correct amount of RMDs on time and avoid nasty penalties.
1. Use Form 5498 as a basis for calculations
Each year, the custodian or trustee of an IRA is required to send you an annual information return—Form 5498, IRA Contribution Information. The title of the form implies that it’s relevant only if you put money into the account, but actually there’s information on the form for RMDs. Box 5 displays the fair market value of the account as of the last day of the previous year, which is the amount on which you base your RMD.
If the amount that’s shown on the form is different from the fair market value on your year-end account statement, contact your custodian or trustee to resolve the issue. The IRS is looking at the form, and not your statement, to see if your RMD is correct.
2. Use IRS information to make your calculations for RMD
You can figure your RMD using an IRS table in the appendix to IRS Publication 590-B. The percentage in the table is applied to the account’s value as of the end of the previous year (special rules apply if you delay your first RMD to April 1 of the year following the year of attaining age 70½ because two distributions will be required for this year). Be sure to use the right table for your situation:
- Most individuals use Table 3, Uniform Lifetime.
- A person who inherits an account uses Table 1, Single Life Expectancy (see special rules for spouses, below).
- Individuals who are married to a spouse who is at least 10 years younger and is the sole beneficiary of the account use Table 2, Joint Life and Last Survivor Expectancy.
3. Get help with figuring your RMD
Your custodian, trustee or plan administrator may provide you with your annual RMD amount for each account. This saves you the trouble of making your own calculations.
If you have multiple IRAs, once you compute your RMD for each account, you are permitted to take the total RMDs from one or more of these accounts. Thus, if you have an account that is performing well, you may opt to take your RMDs from a lesser-performing account. But beware when it comes to qualified retirement plans. You cannot take an RMD for one plan account from another; separate RMDs from each qualified retirement plan are mandatory.
4. Turn your account into an annuity
If you don’t want to be burdened with figuring your RMD and remembering to take it before the end of the year, you can invest your retirement funds in a tax-qualified annuity. The RMD process becomes automated. There’s no tax when the annuity contract is purchased for you. However, there are substantial fees for the annuity, so weigh convenience against cost.
5. Make qualified transfers to charity
If you are age 70½ or older, instead of taking a distribution of your RMD, you can transfer it to a qualified charity. Each year you’re permitted to make a direct trustee-to-trustee transfer of up to $100,000. The amount you transfer counts toward your RMD, and you’re not taxed on this transfer (you can’t take a charitable contribution deduction for the transfer). This transfer option applies only to IRAs, not to qualified retirement plans or IRA-like accounts, such as SEPs and SIMPLE-IRAs.
6. Pay attention to inherited IRAs
If you are a surviving spouse, you can treat inherited IRAs and retirement plans as your own. This means you’re allowed to roll over the account and don’t need to start RMDs until you reach age 70½, even if your spouse was older than you.
If you are a non-spouse beneficiary, you usually don’t need to begin RMDs before the end of the first year following the year of death. Thus, if you inherit an IRA from your uncle in 2018, your RMDs must start by December 31, 2019. However, you can delay RMDs if you use the “five-year rule.” No RMDs are required as usual, but you must fully distribute the account by the end of the fifth year following the year of death. So if you didn’t begin RMDs by December 31, 2019, in the example above, you won’t be penalized if you take all the funds from the account by December 31, 2023.
Look for ways to minimize RMDs when there are also beneficiaries who are not individuals (e.g., charities, the owner’s estate).