It’s that time of year if you are an IRA owner age 70 ½ or older. You must take your required minimum distribution (RMD) before the end of the year. Not taking your RMD or the correct amount can result in crippling penalties, which is why we cover this topic in great detail at The Slott Report.
Here are three RMD mistakes you must avoid. Remember, it’s not too late to take your RMD, just make sure you do it correctly with the assistance of a competent, educated financial advisor like those who train in this specialized area.
Aggregating Required Minimum Distributions (RMDs)
You have an IRA, a 401(k) and a 403(b). How many RMDs do you have to take? Three. You have to take an RMD from each of those plans. They cannot be added together.
You have two IRAs, two 403(b)s and two 401(k)s. How many RMDs do you have to take? Four. You can add together your IRA RMDs and take the total from one IRA. You can also add together your 403(b) RMDs and take the total from one 403(b). You cannot add together your 401(k) RMDs (or any other plan‘s RMDs) so you must take two distributions.
If you have aggregated the wrong accounts, you still have time to take the RMDs you missed.
You are over the age of 70 ½, are still working and participating in the employer’s 401(k) plan. You do not own 5% or more of the company. The company has a still working exception to the RMD rules. You separate from service this year. You have an RMD from the plan for this year, even if you separate from service on December 31. That RMD must be paid out to you before any funds can be moved to an IRA.
If you have rolled your RMD to an IRA, you now have an excess contribution in your IRA. You have until October 15 of next year to tell your IRA custodian that you need to remove the funds as an excess contribution.
Roth IRA Conversions
You are age 70 ½ or older this year and did a Roth IRA conversion. You cannot convert your RMD to a Roth IRA. The RMD must be paid out before you do a conversion.
If you have converted your RMD to a Roth IRA, you now have an excess contribution in your Roth IRA. You have until October 15 of next year to tell your Roth IRA custodian that you need to remove the funds as an excess contribution.
By Beverly DeVeny, IRA Technical Expert
Copyright 2015 Ed Slott and Company The Slott Report