Like failing to update beneficiary information, taking required minimum distributions is one of those (somewhat) simple things too many people forget.
Maybe it’s the holidays. Or too many other year-end errands, but whatever the reason, make sure clients avoid the tax trap and take it before it’s too late.
The Internal Revenue Service helpfully reminded retirees born before July 1, 1948 that they must take distributions from their IRAs and workplace retirement plans by Dec. 31.
However, those who reached age 70½ during 2018 are covered by a special rule that allows them to wait until April 1, 2019, to take their first RMDs.
This means that those born after June 30, 1947, and before July 1, 1948, are eligible for this special rule for 2018. If they wait until early 2019 to take that first RMD (up until April 1, 2019), it can be counted toward their 2018 RMD, but is still taxable in 2019.
The special April 1 deadline only applies to the RMD for the first year.
For all subsequent years, the RMD must be made by Dec. 31.
So, for example, a taxpayer who turned 70½ in 2017 (born after June 30, 1946, and before July 1, 1947) and received the first RMD (for 2017) on April 1, 2018, must still receive a second RMD (for 2018) by Dec. 31, 2018.
Types of retirement plans requiring RMDs
The required distribution rules apply to owners of traditional, Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs. Roth IRAs don’t require distributions while the original owner is alive. RMDs also apply to participants in various workplace retirement plans, including 401k, 403b and 457b plans.
An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner.
Often, the trustee shows the RMD amount on Form 5498 in Box 12b.
For a 2018 RMD, this amount is on the 2017 Form 5498 normally issued to the owner during January 2018.
An IRA owner must calculate the RMD separately for each IRA they own, but can withdraw the total amount from one or more of the IRAs. However, RMDs required from workplace retirement plans (like 401(k), 403(b), and 457(b) plans) have to be taken separately from each of those plan accounts.
IRS online forms and publications can help
The RMD for 2018 is based on the taxpayer’s life expectancy on Dec. 31, 2018, and their account balance on Dec. 31, 2017.
The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Use the online worksheets on IRS.gov or find worksheets and life expectancy tables to make this computation in the Appendices to Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
For most taxpayers, the RMD is based on Table III (Uniform Lifetime Table) in IRS Publication 590-B. So, for a taxpayer who turned 72 in 2018, the required distribution would be based on a life expectancy of 25.6 years.
A separate table, Table II, applies to a taxpayer whose spouse is more than 10 years younger and is the taxpayer’s only beneficiary.
Though the RMD rules are mandatory for all owners of traditional, SEP and SIMPLE IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs.
Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulations in Publication 575.
Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.
Find more information on RMDs, including answers to frequently asked questions, on irs.gov.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
