Pitfalls of Required Minimum Distributions

According to the Oxford English Dictionary a pitfall is a trap or a snare. Typically this trap is a pit flimsily covered or camouflaged. Another definition for pitfall is a hidden or not easily recognized danger or difficulty. Pitfall is the most appropriate word to describe the difficulty a taxpayer encounters when trying to navigate Required Minimum Distributions (RMD) and account types.

Almost everyone has heard about, or read the phrase, Required Minimum Distribution. The RMD is a requirement that taxpayers begin to take distributions from their retirement accounts. This is the government’s way of finally making you pay taxes on all those deferrals and the tax deferred growth in those accounts. The RMD is to begin no later than April 1 of the year after the taxpayer turns 70 and a half. So with that said: Are you beginning to see a pitfall?

After hearing this, many people wonder if there is a requirement to take the RMD from specific accounts or just one account? This is where the “not easily recognized danger” is the most appropriate definition. If the account holder has more than one IRA (not an inherited/beneficiary IRA), they must calculate the RMD for each IRA separately. However, they may aggregate their total RMD amounts for all of their IRAs and withdraw that total from only one IRA or a portion from each of their IRAs.

RMDs for qualified plan accounts (401(k), Profit Sharing, etc.), other than IRAs, must be calculated and paid separately from the RMDs for the account holder’s IRAs. If the account holder has more than one qualified retirement plan account, the RMD must be calculated and paid separately for each qualified plan account.

The trap is that if the taxpayer fails to withdraw the RMD amount (in the correct manner), the IRS will assess a sizeable excise tax. The amount not withdrawn, or withdrawn incorrectly, is taxed at 50 percent. Indeed this is a pitfall!

My special thanks to BT in Atlanta, GA, for today’s question!

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