In a recent general information letter released by the Internal Revenue Service (Number: 2016-0039), the IRS reiterated some rules regarding required minimum distributions (RMDs) and the required beginning date (RBD) for taking RMDs. The taxpayer had asked how to calculate the RBD, whether full-time separation from service is required to begin to receive RMDs and whether the total amount of the RMD may be withdrawn from one of the taxpayer’s multiple retirement accounts or whether the RMDs must be withdrawn on a pro rata basis from all accounts.
Individual Retirement Accounts
For IRAs, the requirement to take RMDs begins on April 1 of the year following the calendar year in which the taxpayer reaches age 70.5. For employer-sponsored retirement plans, such as Internal Revenue Code Section 401(k), profit-sharing, IRC Section 403(b) or other defined contribution and pension plans, the requirement to take RMDs generally begins on April 1 following the later of the calendar year in which: (1) the taxpayer reaches age 70½, or (2) retires. If a qualified plan participant owns more than a 5 percent interest in the company that sponsors the plan, however, the RBD is April 1 of the year following the year the owner turns age 70½, even if the taxpayer is still working. Note also that a plan is permitted to provide that the required beginning date for all employees is April 1 of the calendar year following the calendar year in which an employee attains age 70½, regardless of whether the employee is retired or is a 5 percent owner.
Example: Linda turns age 70½ in 2016. The first year that she must take an RMD for is 2016, but she doesn’t have to take that distribution until April 1, 2017, which is her official RBD.
Example: If Devin is 72 and still working at Procter & Gamble, his RBD for his Procter & Gamble qualified plan doesn’t begin until April 1 of the year following the year he retires from Procter & Gamble (unless the plan provides otherwise). If, however, Alex retired from Procter & Gamble when he was 65, his RBD is April 1 of the year following the year he turns 70½.
Example: Nicholas is 70 and works at XYZ Company. Nicholas owns 25 percent of XYZ Company. Because he’s a more than 5 percent owner, his RBD for his XYZ Company qualified plan is April 1 of the year following the year he turns age 70½, even if he’s still working at XYZ Company.
Neither the IRC nor the Treasure Regulations define the term “separation from service" for purposes of determining a qualified plan owner’s RBD. The IRS indicated that the terms of the retirement plan will govern whether an employee who’s reached aged 70½ and is still employed on a part-time basis is required to begin to receive their RMDs.
If a taxpayer owns multiple IRAs, they must calculate the RMD separately for each IRA that they own, but can withdraw the total amount from one or more of the IRAs. Similarly, a Section 403(b) contract owner must calculate the RMD separately for each Section 403(b) contract that they own, but can take the total amount from one or more of the Section 403(b) contracts. RMDs from other types of retirement plans must be taken separately from each of those plan accounts.
Example: Alex has three IRAs. The 2016 RMD for each IRA is $100, so his total 2016 RMDs are $300. Alex can take $300 from only one IRA and nothing from the other two and still satisfy his RMD requirement for the year. As long as he takes out at least $300 from one or more of my IRAs for that year, he’s satisfied his RMD requirement.
Example: Alex has one IRA and one qualified plan. The 2016 RMD for the IRA is $100 and the 2016 RMD for the qualified plan is $200. Alex must take $100 from his IRA and $200 from his plan in 2016 to satisfy his RMD requirements. Any distribution he takes from his IRA doesn’t satisfy his RMD for his plan and vice versa.
The penalty for failing to take a proper RMD is 50 percent of the shortfall. It’s therefore important for practitioners to know when a taxpayer must begin taking distributions from their tax-deferred retirement accounts and what distributions satisfy the RMD requirement.