By Nancy G. Montanye, CPA

Required minimum distributions (RMDs) are the minimum amounts that must be withdrawn annually from a retirement account. Time is running out if you are required to make a withdrawal this year because the deadline is Dec. 31. (If you had your 70th birthday before June 31 of last year, you may get a reprieve to April 1.) If the RMD is not taken from your individual retirement account (IRA) in a given year, any excess accumulation will result in an additional tax.

RMDs are calculated each year based on fair market value (FMV) as of Dec. 31 of the prior year and by using the applicable IRS Life Expectancy Table. The RMD is calculated separately for each IRA account, but may be taken from a single or multiple IRAs, in a lump sum or in periodic payments. Excess withdrawals are permitted, but they cannot be carried over to reduce future RMDs. The IRS receives copies of Form 5498 (which shows the FMV and RMD amount) and Form 1099-R (which reports distributions), so that information can be readily used by the IRS to determine excess accumulation even if not reported by the taxpayer.

RMD rules apply each year to account owners (participants) during their lifetime, beginning no later than April 1 in the year after turning age 70 ½. Note: Roth IRAs have no RMDs during one’s lifetime. RMD rules also include the following:

• Qualified charitable distributions count toward the RMD.
• Designated beneficiaries have required minimum distributions beginning in the year following the death of the IRA owner (for both regular and Roth IRAs).
• A spouse beneficiary has additional options, which may delay the need for RMDs or the amount of RMDs.
• An estate or charity is not considered a beneficiary for RMD purposes; these accounts must be fully distributed no later than five years after death.

The amount of the additional tax is 50 percent of undistributed RMD, which is reported on Part IX of Form 5329. This additional tax is added onto the 1040 individual income tax return, or paid separately if no tax return is filed. All or part of this additional tax can be waived by the IRS if there was reasonable cause for the shortfall. Follow the instructions for completing the form. To request a waiver, a statement must be attached to Form 5329 with an explanation of the reasonable cause for the error as well as the steps being taken to correct the shortfall, which includes taking the late RMD and describing how this mistake will be prevented in the future. The IRS will then review the information and decide whether to grant the waiver. In this situation the tax is not paid until after the IRS determination, if the waiver is denied.

The best advice is to take the required withdrawal early in the year, and not to wait until December. This is partially due to the RMD requirement being applicable even in the year of death. If an RMD was not made prior to death, the executor of the estate would be required to take the RMD or be subject to the 50 percent excise tax.

If you want to take more than the RMD, careful tax planning for extra withdrawals is advised. Since RMDs are taxable, the increased income can affect the taxability of Social Security, among other issues.

After spending a lifetime of saving for retirement, carefully plan how you want to spend those funds so that you get the most benefit from your hard-earned efforts.

Nancy G. Montanye, CPA, is a sole practitioner in Williamsport, Pa. She is a PICPA member and serves on the CPA Image Enhancement Committee.