Dear Tax Talk,
At 72, I’m required to take the required minimum distribution, or RMD. I am very lucky to have traditional IRAs and a 401(k). I’ve been advised that if my RMD is $10,000, I must take $5,000 from the IRA and $5,000 from the 401(k). I’m not allowed to take $10,000 from 1 account or the other to satisfy the current-year RMD. Really?
Your advisers are correct, as there are some differences in the RMD rules for IRAs (traditional, SEP and SIMPLE) and defined contribution plans, including 401(k)s.
For IRAs, which include traditional, SEP, SIMPLE and SARSEP IRAs, the RMD amount can be aggregated among all of your IRAs. The withdrawal can then be made from 1 IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA.
What is a SARSEP?
A SARSEP is a type of simplified employee pension, or SEP. The retirement plan for very small businesses enables employers to contribute part of an employee’s pay to an IRA or annuity. SARSEPs are phasing out, as they weren’t allowed to be established after 1996.
Unlike with IRAs, there are slight differences for the RMD rules for defined contribution plans, which include 401(k) plans. According to the IRS, the RMD must be calculated separately for each plan and the appropriate amounts must be withdrawn from each 401(k) account. There are no allowances to aggregate amounts between separate 401(k)s and certainly none to cross-aggregate with IRAs.
The calculation of the RMD amount is, however, the same for IRAs as it is for 401(k)s. The adjusted market value as of Dec. 31 of the preceding year is divided by the period that corresponds with your age in the Uniform Lifetime Table published by the IRS.
This is very important to track, as the amount not withdrawn will be taxed at 50% on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. There are provisions for requesting a waiver from the IRS. However, it is done on an individual basis when you file the form.
RMDs can involve rather complicated calculations, but your plan sponsor or administrator should be able to calculate these amounts for you.
Thanks for the great question and all the best to you in your retirement!
Ask the adviser
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.