The SECURE Act, which affects retirement accounts, may be signed into law by the time you read this. I’ll update you next week. In the meantime, let’s talk about the law on required minimum distributions (RMDs) as it stands right now.
Every year in December, I remind people to check their RMD obligations for the year. RMDs (required minimum distributions) impact those age 70 1/2 and older (the owner of the IRA or other tax-deferred account), as well as those who inherit retirement accounts irrespective of age.
The annual RMD is not optional. It is mandated by law. And there are heavy financial penalties for failing to take the RMD on time. The penalty (an excise tax) is 50 percent of the amount you should have withdrawn. For example, if you missed your 2019 RMD of $10,000, you owe the U.S. Treasury $5,000.
Fidelity Investments has 1.2 million customers who are subject to RMD requirements. Of those, 56% have yet to take the full required distribution for 2019, according to Michael Shamrell, vice president of communications at Fidelity, while 44% have taken no distribution as of yet for 2019.
If that includes you, no matter where your retirement account (such as a traditional IRA) is custodied, do yourself a favor. Make sure to double-check your 2019 RMDs. If you have any doubt about meeting your RMD requirement, call your IRA custodian. Have the custodian help you review your IRAs and other tax-deferred accounts to make sure that your RMDs have been taken properly. You’ll want to take care of this quickly, since time (Dec. 31) is of the essence.
To avoid last-minute RMDs in the future, you can ask your custodian to set up an automatic withdrawal. An example is Fidelity’s automatic-withdrawal form (https://tinyurl.com/r8x2944).
One more important point: While most people think of RMDs as senior-only issues, they are not. People who inherit IRAs (beneficiaries) also are subject to RMDs, no matter their ages.
Your beneficiary is the person you name to inherit your IRA at your death. You do that using a beneficiary designation form provided by the bank, brokerage firm or mutual fund that acts as custodian of your IRA.
The beneficiary has no rights (and no RMD requirements) until the owner dies. At that time, the beneficiary inherits the IRA, triggering RMD requirements.
The rules and timing are complicated by different rules based on the owner’s age at death (before or after his “required beginning date”) and whether the beneficiary is a spouse, other person or an entity, such as a charity or an estate.
Different rules also apply to Roth IRAs. There are no RMDs for Roth owners, but people who inherit a Roth do have RMDs. However, Roth RMDs will not trigger a tax bill in most cases.
If you want some background, read IRS Publication 590-B, “Distributions from Individual Retirement Arrangements (IRAs),” 63 pages of essential information. You can find it at https://www.irs.gov/pub/irs-pdf/p590b.pdf, and its companion publication, 590-A (“Contributions to Individual Retirement Arrangements”), at https://tinyurl.com/jortqhl.
For RMD purposes, be sure to read “When Must You Withdraw Assets?” on Page 6 of Chapter 1 (590-B) on traditional IRAs. There you will find a number of examples that are worth studying. You are the “owner” of the IRA unless the IRA in question is “inherited.”
I also recommend two additional IRS resources: 1) “Retirement Plan and IRA Requirement Minimum Distribution FAQs” (https://tinyurl.com/gr7dhap) and 2) “Dec. 31 deadline for most retirees to take required minimum distributions” (https://tinyurl.com/yxyu49va).
For a little more context, we know from studies done by the U.S. Treasury that missing an RMD may be due to lack of education about potential penalties for failing to take RMDs on time.
In a report about the 2012 tax year, the Treasury Inspector General For Tax Administration’s most recent report (2015) on suggested improvements that can be made to “Educate and Notify Taxpayers of Required Minimum Distribution Requirements From Individual Retirement Arrangements” identified “nearly 639,000 taxpayers with IRAs worth $40.4 billion” who may not have taken their RMDs.
The reason? Lack of knowledge. “While there could be many reasons for these taxpayers not taking the distribution, taxpayer feedback received by the IRS indicates that some of them did not take the distribution as required because they were simply unaware of the rules.”
To read the Inspector General’s report, go to https://tinyurl.com/sg369ss.