RETIREMENT PLAN TAX TIPS: RBDS & RMDS
by Michael Wiener, E.A.
Under general tax principles, IRA owners cannot keep funds in a Traditional IRA including SEP and SIMPLE indefinitely. If there are no distributions or if the distributions are not large enough, you may have to pay a 50 percent excise tax on the amount not distributed as required (excess accumulation) and report the excise tax by filing Form 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax- Favored Accounts. If you are the owner of a Traditional IRA, you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach 701/2.
April 1 of the year following the year in which you reached age 701/2 is referred to as the required beginning date (RBD).
Your required minimum distribution (RMD) is the minimum amount you must withdraw from your account each year. You can withdraw more than the minimum required amount. Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts). Note under a Roth IRA you are not required to take a RMD if you are the original owner. However, under a Traditional
IRA you must start taking RMDs by April 1 following the year in which you turn 701/2 and by December 31 of later years.
Example You reach age 701/2 on August 20, 2015. For 2015, you must receive the RMD from your IRA by April 1, 2016. You must receive the RMD for 2016 by December 31, 2016. Note if you do not receive your RMD for 2015 until 2016, both your 2015 and your 2016 distributions will be included in income on your 2016 return.
The RMD for any year is the account balance as of the end of the immediately preceding calendar year divided by the distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner. See IRA RMD Worksheet Tables to calculate the RMD during the participant or IRA owner’s life as follows: (1) Joint Life and Last Survivor Expectancy Table-if your spouse is the sole beneficiary and is more than 10 years younger than you; and (2) Uniform Lifetime Table –for all other IRA owners calculating their own withdrawals.
Lastly, for the year of the account owner’s death, use the RMD the account owner would have received. For the year following the owner’s death, the RMD will depend on the identity of the designated beneficiary. Beneficiaries of retirement accounts and IRAs calculate RMDs using the Single Life Table (Table I, Appendix B, Publication 590-B Distributions from Individual Retirement Arrangements (IRAs). The account balance is divided by this life expectancy to determine the first RMD. The life expectancy is reduced by one for each subsequent year. Spouses who are the sole designated beneficiary can: (1) treat an IRA as their own; (2) base RMDs on their own current age; (3) base RMDs on the decedent’s age at death, reducing the distribution period by each one year, or (4) withdraw the entire account balance by the end of the 5th year following the account owner’s death, if the account owner died before the RMD. If the account owner died before the RBD, the surviving spouse can wait until the owner would have turned 701/2 to begin receiving the RMD. See PUB 590-B Chart for RMDs for calculating required distributions for beneficiaries.
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