Being an owner of the traditional IRA that provides you with tax advantages, you may aware in advance that upon reaching the required beginning date, April 1 after you reach age age of 70½, it is obligatory for you to take an IRA RMD (Required Minimum Distribution). The accurate amount of your IRA RMD will be figured according to an IRS formula that totals your entire balance in all IRAs you own and divides by your estimated expectancy of life. The general idea is that you empty your IRA during your lifetime and IRS collects income taxes on these distributions.
Normally, the documentation and the important calculations that are required for you to start receiving your IRA RMD are done by your IRA trustee or your IRA provider (sometimes called IRA custodian), but as the requirements to make sure that the payments for these IRA RMDs are done correctly is your own, it is necessary to know how they operate. Should you possess more than one IRA account and you wish to compute the IRA RMD, you must be able to do all the required calculations yourself.
The most frequently asked questions that are related to the IRA RMD and their answers are given below:
Q: Is there an IRA penalty if I fail to take an IRA RMD?
A: Yes. Per IRS, you will be liable to pay a penalty of 50% on the amount that should have been withdrawn by you. This adds to the federal and /or state income taxes due and you will still be required to take the RMD. You may be able to avoid the penalty if you have a very good reason why the IRA RMD was missed (e.g. you have Alzheimer's) but exceptions are few and far between.
Q: Is there an IRA RMD from every IRA account?
A: It is your choice form which IRAs to take your withdrawal. If you hold your retirement savings in multiple traditional IRAs, it is your responsibility to compute the required IRA minimum distribution that is needed by every account obtaining a payment equal to this total.
However, know that you are not required to take your IRA minimum distribution from each account. As an illustration, if you have three separate IRAs and your calculated IRA RMD is $3,000, you can elect to withdraw the $3,000 from just one of the IRAs or in any combination. IRS just cares that you withdraw the $3,0oo, report it ion your tax return and pay the tax due.
Q: Can my IRA RMD be rolled over?
A: No. The IRS requires that you withdraw the money and pay tax on it. You are not eligible to rollover your IRA RMD to another IRA, as this would defeat the major purpose of the requirement in the first place. The IRA RMD has been set up to limit the tax deferral to your lifetime (even though your heirs who inherit your IRA balance can continue to get deferral over their lifetime).
Q. Can My IRA RMD be assets or does it have to be cash?
A. IRS is totally okay with you distributing property such as shares of stock, shares of mutual funds, bonds or other assets that you hold in your IRA and depositing that property into your non-retirement brokerage account. This is called and "in kind distribution." It is not required that you first sell the property and distribute cash from your IRA to satisfy your IRA RMD.
You might also like:
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions
My 77 year old mother passed away without taking the RMD for the year. The beneficiary is a Trust. Should this year's RMD be calculated based on my mother's age or based on the age of the oldest Trustee? Thank you.
take the 2012 RMD NOW in early 2013 on behalf of your mother and report as a distribution on her 2012 tax return (deposit into one of her regular accounts such as a bank account). Attach a letter to the tax return explaining that your mother was ill and that is the reason that distribution was taken a few days late. Note that the penalty should be paid on the late distribution (see http://www.required-minimum-distribution.com/rmd-missed.html. The trust will start its distributions in 2013. A trust would have to draw down the IRA in installments every year over the life expectancy of the oldest trust beneficiary. Note: do not reply on this as accounting or legal advice--always consult a qualified professional.