All individuals over the age of seventy and a half who have an IRA account will have to take a required minimum distribution (RMD) each year. This law is designed to prevent wealthy older individuals from accumulating too much in an IRA and receiving unfair tax advantages. If you fail to take an RMD, you are penalized at a rate of 50 percent of the distribution amount. However, these unique rules may affect the penalty status.
#1 Transferring an RMD
Previously, it was considered unlawful to transfer an IRA account to another account provider with an RMD still intact. This meant that an account holder had to first take the RMD, then carry out the transfer. Today, you may transfer an account with an RMD intact as long as you take the RMD by the deadline provided by the IRS.
#2 Rollover Eligibility
While you can transfer an RMD, you cannot roll it over. This means you cannot transfer it to another form of retirement plan, including a Roth IRA or a Traditional IRA, if this marks a change in your account structure. If you do rollover an RMD, you will be forced to take on the 50 percent penalty for failing to take the distribution.
You may be one of many Americans with several forms of retirement plan. For example, you may have an IRA you independently contributed to while with one employer and a 403b account you participated in through another. If the accounts are of a different structure, you cannot aggregate the RMD. This means you will have to take a separate RMD for each account, and it must be taken from the account where it is calculated. If you own multiple accounts of the same structure, such as multiple IRAs, you may aggregate the RMD and take it from any account eligible.
#4 Death and Divorce
The status of your marriage is set on January 1st of each plan year. This means, if you are married as of January 1 this year, you will not see a change in your RMD rules if you divorce during this plan year. The same is true if your spouse dies this year; the death is not officially recorded on your IRA until the following year. This affects a number of calculations on your RMD, and it particularly affects the life expectancy calculation. Your RMD is calculated on either your life expectancy or a joint life expectancy while your spouse is still living. This will hold true until the year following the year of the death of your spouse.
#5 Family-Attribution Rule
When you own at least 5 percent of a business, you are subject to a different RMD deadline. This deadline requires you take your first RMD by April 1st of the year after you turn seventy and a half. When you own your business, your spouse or family may be employed by the company. Their ownership status is, by default, the same as yours. This means they will be subject to the same deadline on their individual IRA RMD each year.