IRAs: More FAQs about RMDs

June 23, 2017 11:55 AM
By Brian Dobbis

Insights on estates as beneficiaries, how RMDs are calculated after annuitization, and minimum Roth 401(k) distributions



The more I meet with financial advisors, the more I’m asked about required minimum distributions (RMDs) from IRAs. As I’ve explained in prior blogs, RMDs are a highly specialized area of retirement planning, and due care should be taken to familiarize oneself with the maze of rules that apply. The consequences for missing an RMD are severe: a 50% penalty surtax assessed on the amount of the RMD that should have been taken. So with that penalty in mind, here are some recurring questions and answers you might want to file for future reference.

Q. What options does the estate have when named as an IRA beneficiary?
The answer depends on when the account owner died. The tax code allows for two distribution options:

If the owner died before his required beginning date (RBD, which is defined as April 1 of the year after attaining age 70½), the “five-year” rule will apply. In other words, the IRA will have to pay out to the estate for five years after the date of the account owner’s death. No other distribution method is available, including the option to “stretch” out payouts over a specific time period.

For example, suppose John, 70, died in 2016, before reaching his RBD, but had named his estate as beneficiary. Because the estate was not a designated beneficiary (i.e., an individual), the five-year rule would apply. The entire IRA balance would have to be distributed by December 31, 2021. 

However, the five‐year rule differs from other RMD rules. Unlike other RMD‐payout methods, the five‐year rule does not require annual distributions. Instead, the only requirement is that the entire account balance must be distributed by December 31 of the year that includes the fifth anniversary of the account owner’s death. In other words, under the five‐year rule, an RMD theoretically could be postponed until the final year of the payout period, when the entire sum could be taken at once.

On the other hand, if the IRA owner died after his RBD, different payout rules would apply. In this case, distributions could be made over the balance of the payout period already underway, as if he or she had continued to live.  

Q. How are IRA RMDs calculated after the annuity is annuitized?
It depends. For example, if Stacy has only one IRA that’s solely invested in an annuity, the RMD amount is straightforward: it would be the annuitized amount that is distributed annually from her IRA. 

Conversely, minimum distribution payouts rules are tricky when there are multiple IRAs at play. So suppose Gina has two IRAs: IRA #1 is invested in mutual funds, while IRA #2 has been annuitized, paying/distributing an amount annually. In this situation, the annuity payout will satisfy the RMD only for IRA #2, whereas the RMD amount for IRA #1 must be determined separately, without regard to IRA #2.

Q. Are Roth 401(k) accounts subject to minimum distributions?
Yes. Unlike their older sibling, Roth IRAs offer the advantage of no lifetime RMDs. However, Roth 401(k)s follow a different set of rules. An individual will need to take RMDs from his/her Roth 401(k) account upon attaining age 70½, unless an exception applies.

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