February 2, 2016
Required Minimum Distributions – Beware of April 1st
Every December we get calls from financial advisors confirming that their client’s Required Minimum Distributions (RMDs) will be made prior to the stroke of mid-night December 31. Failure to process this distribution by 12/31 will have income tax consequences and potentially up to a 50% excise tax.
For participants in either qualified plans and/or IRAs, who are over 70 ½, the IRS mandates that they begin to annually draw down their account balances. (There is an exception that non-owner participants, who are still actively working, can delay receipt of their RMD from their company sponsored 401(k) plan until they retire.)
In the year that a retired participant turns 70 ½ he/she has a one-time option to delay receipt of this RMD until the April 1st of the following year (e.g., Julie turns 70 ½ in August of 2015, she can delay her first RMD until April 1, 2016). This can be advantageous if the participant is anticipating a large tax bill and wants to further delay receipt of this taxable income. What many participants do not realize is that the April 1st distribution is associated with the prior year and that another distribution is due for the current year by December 31st. So, if a participant delays the first payment to the following April 1, next year there will be two payments required.
As mentioned above failure to receive the RMD by April 1st and/or December 31st will lead to tax penalties. For those clients who missed the deadlines they might be successful in getting the 50% penalty waved for the following reasons:
- They were affected by a natural disaster and records were lost.
- They were in the hospital.
- They received incorrect advice from a financial advisor or IRA custodian.
- They had a death in the family.
When counseling your clients who are approaching the age of 70 ½ this is an opportunity to discuss the advantages and disadvantages or delaying the first payment. If your client maintains multiple IRAs and 401(k) accounts, RMDs must be taken from each account. Taking one large distribution from one account does not satisfy the IRS requirements for distributions.
Lastly, if your client has Roth accounts, the RMD requirement is not an issue. These amounts have already been taxed and come of out the account tax free.
To learn more about your client’s RMD options:
Email us at: Info@BenefitPractice.com or call us toll-free at: (855) 738-9778
