7 Ways You Can Mess Up Your Required Minimum Distribution

By Jeffrey Levine, IRA Technical Expert
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Taking your correct required minimum distribution (RMD) … it sounds so easy; you just divide the balance of your IRA at the end of last year by your IRS-provided life expectancy factor. What could possibly go wrong? The answer: a lot, an awful lot. While on the surface the rules for calculating a required minimum distribution seem simple, when you begin to dig deeper into the tax code, regulations and other rules, you find that RMDs can actually be incredibly complicated. Worse yet, if you fail to correctly navigate the proverbial RMD minefield, the mistakes you make that lead to an RMD shortfall can land you with a steep 50% penalty. With that in mind – and while by no means an exhaustive list – here are seven RMD mistakes you should avoid at all costs. Also, make sure to read more articles on RMDs so you know when to take one and how to calculate it.

  1. Using the wrong table to determine your life expectancy factor – The overwhelming majority of IRA owners use the Uniform Life Table to determine their life expectancy factor. However, if the sole beneficiary of your IRA is your spouse and they are more than 10 years younger than you, you can use the Joint Life Table. At no time does an IRA owner use the Single Life Table to calculate lifetime RMDs.
  1. Taking your RMD from the wrong type of account – If you have multiple IRAs, you can generally take the total RMD for all of your IRAs from just one IRA as long as the distribution is large enough to cover your cumulative IRA RMDs. However, if you have IRAs and other types of retirement accounts, such as a 401(k), the distributions from one type of retirement account (i.e., a 401(k)) cannot be used to offset RMDs for another type of retirement account (i.e., an IRA).
  1. Failing to adjust your prior year-end balance for an outstanding rollover or transfer – It’s not uncommon for people to move IRA money from one account to another. It happens all of the time for a wide assortment of reasons. If you happen to be moving money from one IRA to another late in the year, it’s possible that your IRA funds might be “in transit” on December 31 and thus, won’t be included in the year-end balance of either the distributing IRA or the receiving IRA. If that’s the case, you have to “manually” add in the value of the outstanding rollover or transfer into your prior year-end balance to calculate your RMD.
  2. Failing to adjust your prior year-end balance for a recharacterization of a Roth IRA conversion made in the year after conversion – Similar to the previous mistake, a manual adjustment may have to be made to your prior year-end IRA balance if you converted a portion of your IRA to a Roth IRA last year, but recharacterized all or a portion of that conversion this year. For instance, suppose you converted $50,000 to a Roth IRA in 2014, but when you went to file your 2014 tax return, you were unhappy with the resulting tax bill and decided to recharacterize the conversion and have the funds go back to a traditional IRA. The converted funds were not actually in your year-end traditional IRA balance, but now, once the recharacterization is made, the conversion is treated as though it never happened. Therefore, you must pretend like Roth money was traditional IRA money and make a manual adjustment to your prior year-end balance.
  3. Taking your RMD from your spouse’s retirement account – If you are married and file a joint return, income from both your IRA and your spouse’s will be reported on line 15 (a/b). Thus, there will generally be no difference in your tax bill whether you take a distribution from your IRA or your spouse’s IRA. That might lead you to believe that you can take your RMD from your spouse’s IRA, or visa-versa. After all, what does Uncle Sam care if he gets the same thing either way? Well he does care, which means you have to as well. Your RMDs must come from your IRAs and your spouse’s RMDs must come from their IRAs.
  1. Forgetting to take your RMD altogether – It can be hard enough to remember the things in life that are really important to us, and for most people, RMDs don’t really fit that category. RMDs also only impact IRA owners 70 ½ or older, and there’s little dispute that, on the whole, memory weakens with age. Put those two things together, coupled with the regular chaos of everyday life, and it’s not a surprise to learn that forgetting to take an RMD is not exactly a rare occurrence.
  1. Failing to timely correct any mistakes you uncover – Mistakes happen. That’s an inescapable fact. When it comes to making an RMD mistake though – like most things in life – it’s more about how you deal with the mistake once you uncover it than it is about the mistake itself. If you discover you’ve made an RMD error, you’re subject to a 50% penalty for any shortfall, but… if you take corrective action (i.e., immediately take the amount you should have taken), self-report your mistake to the IRS and properly complete the required paperwork, there’s a good chance that the IRS will waive the penalty. If, on the other hand, you do nothing and the IRS discovers your mistake, you should be prepared to pay up!

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