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Jane Young: Do RMD rules affect you? Time to check

By: Jane Young
November 12, 2017
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photo - Jane Young- It's Your Money
Jane Young- It's Your Money 

As the end of the year approaches, it is time to initiate Required Minimum Distributions to be sure they are processed by Dec. 31. If you will be 70½ or older in 2017, you must take an RMD.

Generally, distributions must be taken by Dec. 31; however, if this is your first time taking an RMD, you have until April 1. It is usually best to take the distribution on Dec. 31 to avoid taking two distributions in one year; this is especially true if you have a large balance in your IRA or retirement account.

RMD rules apply to a traditional IRA, SEP IRA, SIMPLE IRA, SARSEP, 401(k), 403(b), 457(b), and Roth 401(k) plans but not to a Roth IRA, while the owner is still alive. The date on which you must begin taking distributions in a company retirement plan is the latter of when you reach 70½ or when you retire. However, if you own at least 5 percent of your company you must take your RMD at 70½ even if you are still working.

Your RMD is calculated by dividing the balance of your account on Dec. 31 of the previous year, by a life expectancy factor provided by the IRS. You use one of three tables provided by the IRS.

The RMD rules vary for spouse and nonspouse beneficiaries and whether the decedent had begun taking distributions. If you are taking a distribution on your own IRA and your spouse is not the sole beneficiary or 10 years younger than you, use the Uniform Lifetime Table, if your spouse is the sole beneficiary and more the 10 years younger, use the Joint and Last Survivor Table, and if you are the owner of an inherited IRA you must take an RMD and use the Single Life Expectancy Table.

For more information on rules about beneficiary IRAs, go to www.irs.gov or contact your tax adviser.

RMDs are taxed at regular income tax rates and it's generally recommended to withhold taxes to avoid an ugly surprise in April. If you don't take your RMD by the deadline, the IRS will penalize you with a tax equal to 50 percent of what should have been distributed. It's possible to have this penalty waived if you can show that the shortfall was due to a reasonable error and you're making reasonable efforts to remedy the shortfall.

Additionally, IRA owners who are at least 70½ can donate their RMD to a qualified charity and legally avoid paying tax on their distribution.

The RMD must be made directly to the charity and is limited to $100,000 per year.

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