Who Doesn’t Need to Take a 2016 RMD by December 31?

Fall is in the air and the holidays are just around the corner. For many retirement account owners, this means that an important deadline is approaching. Most of those who are 70 ½ or older will need to take a 2016 RMD by December 31, 2016. However, that deadline does not apply to everyone. If you are age 70 ½ or over, when would an RMD not be required to be taken from your retirement account by the upcoming December 31 deadline? Here are some exceptions that might apply to you.

You just reached 70 ½ in 2016. Generally, when you reached age 70 ½ you must take an RMD. However, for the first year you catch a break. You do not have to take your 2016 RMD until your Required Beginning Date (RBD) which is April 1, 2017. You only get lucky once. All future RMDs must be taken by December 31. There is a downside to waiting until 2017 to take your 2016 RMD. You will need to take your RMD for 2016 by April 1 and the 2017 RMD for your second distribution calendar year by December 31. That means two taxable distributions, which would need to be included in income.

You are “still-working.” If you don’t own more than 5% of the company you work for and your plan allows, you can delay your RBD to April 1st of the year following the year you finally retire. This is sometimes called the “still working” exception to the RBD. It does not apply to an employer plan if you are not currently working for that company. This provision is optional on the part of the plan. You should be aware that the still working exception does not apply to IRAs, including SEP IRAs and SIMPLE IRAs.

You have “old money.” If you have a 403(b) and you have funds from participation in the plan from before 1987, there is a rule that allows you to delay RMDs on that money – commonly known as “old money” – until age 75. There must be a cut-off balance clearly showing the December 31, 1986 balance, which most plans will have readily available or it may even be on a current statement. Remember the regular April 1 RBD applies to all other amounts in the plan including earnings on the pre-1987 balance.

You have invested in a QLAC. If you have a Qualifying Longevity Annuity (QLAC), the value of the annuity will be excluded from your retirement account balance for RMD calculation purposes. You must begin QLAC distributions by the month after attainment of age 85.

You have a Roth IRA. You do not need to worry about taking an RMD from your Roth IRA by December 31 because Roth IRA owners are not required to take distributions during their lifetimes. However, your beneficiaries will be required to take RMDs. RMDs are also required from Roth 401(k)s and other employer Roth plans.

You will want to be sure that you do not miss your 2016 RMD. There is a 50% penalty on any required distribution amount that is not taken. That is a big tax hit. If you have questions as to whether one of these exception applies to you, your best bet is to consult with a tax or financial advisor who is knowledgeable about the complex RMD rules.