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Remember the Exceptions to the RMD Rules

Posted by Paul D. Woodard | Jul 31, 2017

Many common retirement savings plans are subject to required minimum distributions (RMDs). This includes traditional IRAs, SEP and SIMPLE IRAs, as well as 401(k)s, 403(b)s, and other defined contribution plans. Once you've reached the mandatory age for taking withdrawals from your IRA or retirement savings plan, you must withdraw a minimum amount to avoid tax penalties. However, like many other tax code provisions, there are exceptions to the required minimum distribution rules. Understanding these exceptions can help you avoid penalties and maximize tax benefits.

Generally, for IRAs, you must take your first RMD by April 1 of the year following the year in which you turn 70½. For 401(k)s and other defined contribution plans, you must take your first RMD by April 1 of the year following the later of the year you turn 70½, or the year you retire.

You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday. For example, if your 70th birthday is June 30, 2015, you would reach age 70½ on December 30, 2015. You must then take your first RMD by April 1, 2016.

The terms of your specific retirement plan govern when you will be required to take your first RMD. Your plan's terms may allow you to wait until you actually retire to take your first RMD. Alternatively, your plan's terms could also require you to begin taking RMDs by April 1 after you've reached 70½, whether or not you have retired. However, if you own 5% or more of the business sponsoring the plan, you must start taking your RMDs based on age regardless of when you actually retire.

Spouses and individual beneficiaries have a number of options for when they have to start taking RMDs after the account owner dies. For example, a spouse can treat an IRA as their own and base the RMD on their own age or on the decedent's age.

Your RMD is calculated based on the prior year-end account balance. For example, your 2018 distribution would be based on the 2017 year-end balance. Of course, there are a number of exceptions to the RMD calculation rules.

For example, if you skip your RMD for a year and are taking make up distributions, you would not adjust the prior year-end account balance for the missed RMD. However, you can adjust employer plan account balances for the missed RMD.

In some instances, you may need to transfer funds or rollover funds from one account to another between the end of December and beginning of January. If this occurs, how do you account for those funds in calculating your RMD? Generally, you have 60 days from the time you receive pre-retirement payments from a retirement plan to roll them over to another qualifying retirement plan or IRA. If the funds are in transit over the New Year, those funds must be added into the prior year's account balance.

Failure to take RMDs can result in harsh penalties. If distributions are less than the RMD for that year, you may be subject to a penalty amounting to a 50% excise tax on the amount not distributed as required. Don't let that happen to you!

If you have any questions about IRA distributions or retirement plan options, Butterfield Schechter LLP is here to help. We are San Diego's largest law firm with a concentration on employee benefits and retirement plan compliance. Contact our office today with any questions you have on how we can help you and your business succeed.

About the Author

Paul D. Woodard

Paul Woodard practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Estate Planning.


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