RMD Aggregation Rules

Retirees often stress over taking money out of their savings to cover living expenses. But imagine the stress of having to spend your savings to cover one of the harshest penalties of all: the 50% fine that is levied for failing to take a required minimum distribution.

You've heard this before: when you turn 70 1/2 years old you must begin taking required minimum distributions (RMDs) as dictated by IRS rules.  But keep in mind that there are two keys to avoiding trouble:

1. WHEN - pay attention to when you must begin taking RMDs
2. WHERE - understand the account aggregation rules that specify WHERE the RMDs must be withdrawn from.

When

It's easy enough to understand the rules when you have, say, one tradtional IRA. Per the IRS:

"If you are the owner of a traditional IRA, you generally must start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70 1/2. If you don't (or didn't) receive that minimum amount in your 70 1/2 year, then you must receive distributions for your 70 1/2 year by April 1 of the next year."

Back to our somewhat simple example of a retiree with one Traditional IRA...let's assume that she turns 70 on April 1, 2019 and reaches age 70 1/2 on October 1, 2019. For 2019, she must receive the required minimum distribution from her Traditional IRA by April 1, 2020.  In addition, she must receive the required minimum distribution for 2020 by December 21, 2020. The downside of this approach is that she will be doubling up on taxable income in 2020 which might push some of that income into a higher marginal tax bracket. 

Where

What if you have more than one type of retirement account? This is where you need to pay careful attention to the account aggregation rules, including the requriements regarding which accounts you must actually take the withdrawal from. By the way, all RMDs are calculated by dividing the balance of the account (or aggregated accounts, if appropriate) by the balance as of the close of business on December 31st of the preceeding year, then dividing by the applicable life expectancy per the IRS. Now back to the aggregation rules by account type:

• Traditional (pre-tax) IRA's - Treat these accounts as one. You can tally up the balances as of the close of business on December 31st of the preceeding year, then divide that total by the applicable distribution period. And it's OK to then pull the RMD from just one of these IRA's.
• Roth IRA's - As long as it's your IRA and you didn't inherit it from a non-spouse, there is no requirement to take a distribution.
• Traditional 401(k)'s and 457 plans - You cannot aggregate these accounts. You must calculate and take the RMD separately from each account.
• Roth 401(k)'s and 457 plans - This is a surprise to many: Roth 401K's and 457 plans ARE subject to required minimum distribution rules. You must calculate and take the RMD separately from each account.
• 403(b) plans - If you have more than one 403(b) you are allowed to aggregate them and the RMD can be satisfied with only one distribution from just one of these plans. 

What do you do if you discover that you have missed an RMD or that you failed to take the distribution from the correct account? Your first move is to take the distribution as soon as you discover the error. Then file Form 5329 asking for forgiveness from paying the 50% penalty, and include a brief letter explaining what happened. Be sure to keep copies of the letter and form, and use a mailing method that allows for tracking so that you can document that it was sent.

If you don't hear back from the IRS that's actually GOOD news. If you are denied the IRS will determine the penalty and will send you a letter explaining the denial of your request. 

If you want help ensuring that you don't make an RMD mistake, you have a few options: enroll in your custodian's automatic RMD service (do this with each account from which you must take an RMD) or ask your financial planner or CPA to calculate this for you and send you a letter outlining the amount that needs to be withdrawn from each account - then take the withdrawals as outlined.