Did you ever have that nagging thought in your head that you are forgetting something? It is understandable as December is full of holidays, gatherings, and lists of things to accomplish. However, the thing that they are forgetting may not be holiday or celebration related, but end of the year related. It is their Required Minimum Distribution or RMD, which is the annual withdrawal of money from tax-deferred accounts. Simply put, the government requires that money start to come out of specific retirement accounts at age 70 ½ and continue for every year until the account balance is zero because they are able to tax the distributions and, quite frankly, the government is tired of waiting for their cut of your account. We could discuss a myriad of IRA related topics and intricacies, however, I would like to focus on three big mistakes related to RMDs.
MISTAKE ONE: Not taking the correct distribution amount
The IRS will levy a penalty of up to 50% of the amount that was not taken from the tax deferred accounts. A common cause of this mistake is forgetting about a small IRA account or balance that may exist at a bank, credit union or other financial institution. Remember that IRA assets can sit in IRA Savings or CD accounts and need to be accounted for if a distribution is required.
MISTAKE TWO: Taking an RMD from the wrong account
This is a less common but not any less painful mistake. If a couple files their taxes as joint and each spouse is required to take an RMD from their respective IRA accounts, the amounts need to come from each spouse's IRA. You are not allowed to combine the total RMD from the couple and take the total amount out of one IRA account. For example, if $4,000 is the RMD for spouse 1 and $2,000 is the RMD for spouse 2, then $4,000 needs to come from spouse 1’s accounts and $2,000 needs to come out of spouse 2’s account.
MISTAKE THREE: Failing to take an RMD from a beneficiary IRA account
A beneficiary IRA account, also known as an inherited IRA account, is simply defined as an IRA account that a beneficiary receives as a result of the primary owner passing away. If you have received an IRA account from someone who has passed away and that person was not your spouse, they may be required to take distributions from that account every year, even if you are not over the age of 70 ½. This rule also applies to inherited Roth IRA assets as well.
As you can see, the rules governing these types of accounts can be confusing and can lead to painful outcomes if not handled correctly. If you have questions regarding RMDs or IRA accounts in general, feel free to reach out to us for more information. It is far better to ask questions of qualified professionals that to receive a letter from the IRS.