Avoiding RMD Mistakes with Retirement Accounts

Most people know that after reaching age 70½, they have to take required minimum distributions (RMDs) from their IRAs. But that rule is only the tip of the iceberg. Not knowing all the RMD rules is a source of many mistakes, resulting in extra taxes and penalties.

Required minimum distributions also must be taken from 401(k) accounts, and the rules for RMDs from 401(k)s differ in important ways from IRA RMDs. When people have multiple types of accounts, the potential errors multiply.

A common error is thinking you can take an RMD from one retirement account and roll it over to another retirement account.

For example, some people take a distribution from an IRA and use the 60-day rollover rule (see our February 2017 issue for details) to deposit the money in another IRA. Or they take the money from a 401(k) account and deposit it in an IRA. Bottom line: An RMD can’t be part of a rollover to another qualifi d retirement account.

An RMD also can’t be deposited in a Roth IRA and treated as a conversion. You have to take the RMD in the year of a conversion and then can roll over the rest of the account.

In the past, we explained the owner of multiple IRAs can take the annual RMD from the accounts in any proportion desired. To review, you fi st calculate the RMD for each IRA. Then, you add the RMDs for each account to determine your aggregate RMD for the year. Take distributions from the IRAs during the year in any proportion you want as long as the total distributions at least equal the aggregate RMD for the year. You can transfer money from one IRA to another during the year and later in the year take some or all of that transfer as a distribution to satisfy your aggregate RMD for the year.

The rules are different for non-IRAs, which many people don’t realize.

Suppose you have two IRAs and two 401(k) accounts with former employers. You can determine the aggregate RMD for the IRAs and take it from the IRAs in any proportion you want. With the 401(k)s (and other employer plans), however, you have to calculate the RMD separately for each account and take the RMD from that account.

SEP and SIMPLE plans are treated as IRAs for this rule. You can aggregate these accounts with your traditional IRAs and take the RMD from them in any ratio you want.

If you have more than one 403(b) plan account, the rules are the same as for IRAs. You can aggregate the RMDs and take the total from the accounts however you want.

But you can’t aggregate the 403(b)s with other types of accounts. For example, if someone has two IRAs and two 403(b)s, the IRAs can be aggregated, and the 403(b)s can be aggregated. But that’s as far as you can go. The IRAs and 403(b)s can’t be aggregated into one RMD.

The general rule: You can’t aggregate different types of accounts for RMD purposes.

Inherited IRAs also are different. The RMD for an inherited IRA can’t be aggregated with other IRAs or retirement accounts. The RMD for an inherited IRA must be calculated by itself and be taken from that IRA each year.

Remember that the penalty for an RMD that is missed or too low is 50% of the RMD that should have been taken that wasn’t. It’s important to know the RMD rules and apply them to each account you have. That’s why it’s a good idea to start your RMD planning early. You have to know each type of account and whether or not it is inherited. Then, be clear which accounts can be aggregated for RMD purposes and which can’t.