RMD Distributions
I am working part-time. I have an IRA with one online broker, a 401 K from a former employer with their custodian, and a 401 K with my present employer. I turn 74 this year. When I log into my accounts of the first two, it tells me the amount that I should take for the RMD. I took the RMD for last year and this year for the IRA.
1. Is it safe just to go with these amounts? I am concerned I will do that and then get penalized by the IRS if they determine the amounts are not correct.
2. How does the IRS know if I am taking the correct RMD amounts?
3. My current employer told me that I do not have to take an RMD since I am still working. They did not give me an amount. I was thinking if I delay this to future years, then I will have a larger RMD requirement since my life expectancy will be less. Can I start taking the RMD now and apply the withdrawal as an RMD?
Thank you.
Comments
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Hello,
I’m going to include a link from the IRS that is a great resource for questions about RMDs: https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
Generally, a RMD is calculated for your accounts by dividing the prior December 31 balance of that retirement plan account by a life expectancy factor that the IRS publishes in Tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). Choose the life expectancy table to use based on your situation. (You can see the list of tables under Q4 of the first link)
Your brokerage may provide you with an estimated amount. You are welcome to use the amount provided, however, you may want to use the IRS calculation method to double check. The IRS specifically states that although the IRA custodian or retirement plan administrator may calculate the RMD, the account owner is ultimately responsible for taking the correct RMD amount. So, it may be in your best interest to check that the amount is correct.
The IRS has record of retirement contributions. If an account owner fails to withdraw the full amount of the RMD by the due date, the owner is subject to a 25% excise tax on the amount not withdrawn. The 25% excise tax rate is reduced to 10% if the error is corrected within two years.
If you hold an individual retirement account, such as an IRA or SIMPLE IRA, and are over the cutoff age you must take your required minimum distributions. This is true even if you are still working in any capacity.
However, you can delay taking RMDs from an employer-sponsored plan, such as a 401(k) or a 403(b), if you still work for that employer. The IRS states: "Participants in a workplace retirement plan (for example, 401(k) or profit-sharing plan) can delay taking their RMDs until the year they retire, unless they're a 5% owner of the business sponsoring the plan." If you rolled over a previous employer's plan to your current employer's 401k, then that would still qualify for the delay. If you didn't roll over a previous employer's plan, then you would be required to take an RMD for the plan you didn't roll over.
Choosing to delay based on your employment status is an election. If you do not wish to delay the RMD requirement from your current employers' plan, you can begin taking RMDs now. If you choose to delay, the RMD calculations will change and probably increase like you said since there will be more in the retirement account and you’ll be closer to the life expectancy age. These distributions will be considered RMDs even if you have the option to delay taking them.
