Are You at Risk for This Major Tax Penalty?

By Charles "Bo" Ives

Editor's Note – We have been following Charles "Bo" Ives through his career in the retirement planning world for over a decade now. When you find quality people like Bo, you don't lose track of them.

What we have learned in that time is this...Bo knows IRAs.

So, we asked him to write an article for us outlining the end of year planning considerations for IRAs. Specifically, we wanted him to clarify the important – and sometimes confusing – Required Minimum Distribution (RMD) rules. I think you will agree, Bo has made this difficult area easy to understand.

Bo is the President for Kingdom Trust Company, our newest approved Trustee/Administrator for Perth Mint Certificates in IRAs. After reading Bo's pearls of wisdom, send us an email to get your specific questions answered or to see how Kingdom Trust and ASI can help you with your retirement planning needs.

As 2014 draws to a close, we, as a custodian for Individual Retirement Accounts (IRAs) and other retirement accounts, begin to get a lot of questions concerning Required Minimum Distributions (RMDs).

What Is A Required Minimum Distribution (RMD)?

An RMD is the minimum amount that an account owner must withdrawal from his or her account each year after reaching the age of 70 ½. Whether an RMD is necessary depends upon the type of retirement account owned.

The rule for required minimum distributions will apply if the account owner has reached the age of 70 ½ and owns one of the following types of accounts:

• Profit Sharing Plan
• 401(k)
• 403(b)
• 457(b)
• Traditional IRA
• SEP IRA
• SIMPLE IRA
• SARSEP IRA

Note that Roth IRAs are not included in the types of accounts listed above.

How Are Rmds Calculated?

While it is the responsibility of the account owner to recognize the need to take an RMD and to calculate the necessary amount, most custodians will supply the account owner with a courtesy calculation. However, that calculation will be based solely on the account in their custody. Most will remind the account owner to speak with his or her tax advisor to ensure that he or she is taking enough to cover the amount required.

The 2014 RMD amount would be based on the market value of the account as of December 31, 2013. The RMD is calculated by taking the year-end value of the account and then dividing the value by one of three life expectancy factors found in IRS Publication 590 and listed below:

• Single Life Expectancy
• Uniform Life Table
• Joint & Last Survivor Table

One of the most common questions custodians get is from account owners who have more than one retirement account from which an RMD must be calculated. In the event that an account owner has more than one such retirement account, he or she will need to calculate the amount necessary from each account separately. However, he or she may take the full amount from any one account or from any number of accounts. It is important to note here that account owners with more than one such retirement account may want to seek the help of a qualified tax advisor to ensure that the correct RMD is calculated and taken.

By What Date Must The RMD Be Taken?

Generally speaking, an account owner's first RMD must be taken by April 1st of the year following the year in which he or she reaches age 70 1/2. The IRS has determined that an account owner, who reaches 70 on or prior to June 30, must take his or her first RMD by April 1st of the following year. For example, an account owner who reaches 70 years of age on or before June 30, 2014 is required to take the RMD by April 1, 2015. However, an account owner who reaches 70 years of age between July 1, 2014 and December 31, 2014, will not have to take an RMD in 2015 but must take the first one by April1, 2016. Thereafter, all account holders age 70 ½ and above must take their RMDs by December 31 of each calendar year.

What Happens If An RMD Is Not Taken?

The IRS is serious about taking RMDs. Failure to take the RMD and take it within the time limits prescribed by law will result in the account owner incurring a penalty. The penalty for this is a tax equal to 50% of the amount of the RMD not taken.

As the year draws to a close, readers are encouraged to speak with a tax advisor or financial planner to ensure that any unanswered RMD questions or concerns are addressed. Readers are also reminded that if an RMD still needs to be taken, there is still sufficient time remaining to have that amount removed from the account. This is also a great opportunity to discuss the plans on how and when the RMD can be taken in 2015.