Advisers should be taking these last weeks of 2017 to make sure that there are no oversights when it comes to required minimum distributions (RMDs) from IRAs and company retirement plans.
Remind clients that there is a 50% penalty for missing an RMD. That penalty can be waived though by taking the missed RMD for any back year and filing Form 5329 with IRS along with an explanation for the missed RMD.
Advisers should begin a year-end RMD check-up with an inventory of retirement accounts so you know how many accounts are subject to RMDs and which may be exempt.
An exception would be in a company plan where the employee is over age 70 ½ but still working (and does not own more than 5% of the company, including family ownership). If the plan contains this provision (they don't have to), then the RMD can be delayed until retirement.
That leads to another potential error in the year of retirement. That year becomes the first distribution year so there would be an RMD for that year due by April 1 of the following year. The mistake is when an employee retires and an adviser has him or her do an IRA rollover of the entire plan balance.
A rollover cannot be done until after the RMD is taken. The first money out is deemed to be the RMD and that amount cannot be rolled over or converted to a Roth IRA. Once the RMD is satisfied though, the remaining IRA or plan funds are eligible for conversion.
If the full rollover is done, then you have an excess IRA contribution which must be corrected by removing that excess (the RMD amount rolled over), plus the income or loss attributable to that amount by Oct. 15 of the following year. Otherwise, there will be a 6% excess contribution penalty for every year the excess is not withdrawn.
RMD AGGREGATION RULES
Once the RMDs are calculated for each retirement account, be careful that you follow the aggregation rules. For IRAs, they can be aggregated. The total RMD due for all IRAs can be taken from any one or combination of IRAs (including SEP and SIMPLE IRAs).
The same aggregation rule applies to 403(b)s, but other types of accounts must each make their own RMD distribution. You can never satisfy an RMD from one type of plan by withdrawing from another type of plan. For example, taking more from an IRA will not satisfy the RMD for a 401(k).
Inherited IRA RMDs can only be aggregated when there are several inherited IRAs inherited from the same person. For example, a child who inherits IRAs from each of his parents must take separate RMDs from each inherited IRA, since they were inherited from two different IRA owners.
For those who are taking IRA RMDs for the first time because they turned 70 ½ in 2017, their required beginning date (RBD) is April 1, 2018. But they might want to take part or all of that 2017 RMD this year depending on their tax situation, rather than bunching the first two RMDs into next year. Advisers can help with planning.
Beneficiaries also must take RMDs by year-end, even those who inherit Roth IRAs. Over the years I've had beneficiaries who were told they don't have to begin taking RMDs on their inherited IRAs until they turn 70½. That's wrong. A non-spouse IRA beneficiary must begin RMDs in the year after death, and they also must take any year-of-death RMD not taken by the deceased IRA owner.
Watch the RMD calculation. Use the IRA balance at the end of 2016 to calculate the 2017 RMD. Also make sure to use the proper table. I've often seen advisers and banks mixing up the Single Life Table for inherited IRAs, including inherited Roth IRAs, with the Uniform Lifetime Table for IRA owners. The Joint Life Table only applies when a sole beneficiary spouse is more than 10 years younger than the IRA owner.