New York Estate Planning & Elder Law Blog
SOME PEOPLE ARE TRYING TO SIMPLIFY IT
Many people, even in Washington, realize that retirement planning can be a bit complicated at times. There are all kinds of rules about who can do what and when they have to do it and what they have to do it with. Many people have rightfully complained about how the government and bureacracy values form over substance. In an effort to address these issues the Financial Industry Regulatory Authority (FINRA) issued an investor alert on April 7, 2016 to help address some of the larger and more common questions about the law of required minimum distribution (RMD). As such, it is perhaps time to reexamine or address some of these larger issues about RMDs. It is probably best to first explain that a RMD is the legally minimum that the owner of an individual retirement account (IRA) of some sort must take out without incurring a tax penalty. An IRA can be a 401(k), 403(b) or a roth IRA or any number of other retirement investment vehicle that receives preferential tax treatment under the Internal Revenue Code (26 United States Code).
To begin with, the owners of a Roth IRA do not need to take any RMD. Once the owner passes away, his/her spouse or anyone who inherits it must then take RMDs. With respect to non-Roth IRA accounts, the latest that an IRA owner must take his/her first RMD is on April 1st on the year following that they reach 70 and one half years old. So if you reach 70 and a half on January 2, 2016 the latest you must take a distribution is on April 1, 2017.
It is calculated by reference to a life expectancy sheet prepared by the bean counters at the IRS. More specifically, you have to take the balance in your IRA and divide it by the distribution period. There are different rules if your spouse is the sole beneficiary and they are more than 10 years younger than you. Failure to do so means that there is a tax penalty. You will face a 50% tax penalty on the amount that you did not but should have taken out. If you take out additional amounts, the amount above the RMD is considered regular income and subject to regular income tax laws. There is an exception to this income tax rule for owners of Roth IRAs.
You cannot fail to take out a RMD and make up the difference at a future time. If you own several IRAs you can take a credit from one and apply it to the other, but you cannot cross different types of accounts, such as a 403(b) and a 401(k). If, however, a mistake is made by someone other than you, such as your by broker firm or accountant, the IRS will ask you what steps you took to correct these mistakes. If the mistake itself was a reasonable mistake and you took steps to correct the financial shortfall, the IRS may waive the 50% excise tax.