Retirement savers in Required Minimum Distribution status likely (or at least should) know some of the basics. Some retirement savers will have reached age 70 ½ this year and begin taking their first RMDs.
A popular strategy involves aggregation. IRS rules state that an RMD should be calculated for each account separately. Then, where aggregation is allowed, those RMD amounts can be added together and the distribution taken in any proportion from one or more of the aggregated accounts.
(MORE: Additional information regarding RMDs.)
Here’s a quick rundown on aggregation:
IRA: Aggregation is allowed. The RMD should be calculated for each account separately. Thereafter the RMD amounts can be added together and taken from any one or combination of accounts.
401(k): See “employer plans” below.
403(b): Rules are similar to IRAs. Retirement savers with more than one 403(b) account can calculate the RMD for each account and then add the RMDs together. The total can then be taken from one or a combination of 403(b) accounts.
EMPLOYER PLANS: Aggregation is not allowed. Retirement savers with multiple 401(k), 457(b), defined benefit or other employer plans must calculate the RMD for each individual plan and take that RMD from that plan only.
ROTH IRA: Non-issue as RMDs are not applicable.
When RMDs are calculated incorrectly and/or taken from the wrong type of account the IRS deems it a missed RMD. The penalty is steep – 50% of the amount not taken. Ouch!
While not guaranteed there’s generally an easy fix. Step #1 is immediately taking the missed RMD. Step #2 is filing Form 5329 to report the missed RMD and request IRS relief. Assuming good and reasonable cause for the missed RMD (i.e. “my financial planner is a moron and isn’t good at math – ha!) the IRS may choose to waive the 50% penalty.
Yes and no. RMDs are required independent of pre/post-tax dollars in account. Impact is on tax treatment. When filing income tax return a calculation must be prepared to prorate the distribution into taxable/non-taxable portions.