Clearing the AIR on IRAs (Part IV)

For the fourth and final post in this series, we'll examine required minimum distributions in more depth. Annual distributions from IRAs (after age 70.5) and inherited IRAs (starting immediately upon the death of the original account owner) are highly complex, so always be sure to get the help of a professional. 

Keep in mind that the penalty for skipped distributions is 50% of the amount in question. So, imagine you forget to withdraw $20,000, which might create a $6,000 tax liability at a 30% rate. Not only do you have to still follow through with the withdrawal next year (or as soon as you discover the error), but you'll also have to pay a penalty of $10,000 on top of the tax. It's an incredibly harsh punishment for something so overly complex.

Here are some examples of ways that you can run into trouble (again, not an exhaustive list):

  • 401(K), profit sharing, and 403(B) accounts have their own governing rules. RMDs can wait until after you retire (assuming you work beyond 70.5) EXCEPT if you own 5% or more of the business sponsoring the retirement plan.
  • Rollovers and account transfers that happen over the turn of the year are not exempt from the RMD calculation. If you request a rollover that is withdrawn from your 401(K) on 12/28 and arrives in your hands via check on 1/4, the balance won't be captured by the financial institution that holds your IRA for your 12/31 RMD calculation. You'll have to manually add that amount back in.
  • If a roth conversion is on your mind, you have to satisfy RMDs first.
  • For your own IRA and if you're married, the required distribution amount is dependent on the age of your spouse.
  • For an inherited IRA, the list of different calculation possibilities is even longer.

Well, that's all for now on this topic. I hope you found this series helpful in laying out some of the basics.