Aug 26, 2021

RMDs (Required Minimum Distributions) are a fact of retirement life. The government requires you to take RMDs so that the tax bill can be paid. Consequently, there are a number of laws and regulations that must be adhered to, and failure to do so can result in stiff penalties. Here are the basic RMD facts you need to know to keep your Self Directed IRA healthy. 

RMD Fact #1 – You (almost) always have to take them 

If you have a tax-advantaged retirement account, then you need to start planning on taking RMDs. The only exception is a Self Directed Roth IRA or Self Directed Roth Solo 401(k). Since the Roth was funded with post-tax dollars, no RMDs are necessary. 

RMD Fact #2 – Age makes a difference 

The SECURE Act of 2019 changed the mandatory RMD age to 72. That means that once you turn 72, you have until April 1 to take a RMD. (For those born before 1949, the old RMD age of 70.5 is still in effect.) After that initial distribution, you have to take RMDs by December 31 each year. 

The earliest age you can start taking RMDs is 59.5. If you take a distribution from your Self Directed IRA before that age, you will likely be hit with an additional 10% penalty. There are certain exceptional circumstances where the distribution can be taken early and no additional penalties will be applied. Those can be found on the IRS page dealing with IRA distributions. 

RMD Fact #3 – How much you have to take 

The minimum distribution you must make take every year changes depending on your circumstances. Factors include the total amount of your Self Directed IRA, life expectancy, and whether or not you’re married. You can try to figure it out on your own by using the IRS worksheet. Or you can just ask your accountant. If you want to take out more than the Required Minimum Distribution, that is perfectly legal. You can actually withdraw the entire amount once you hit the minimum age. If you do so, just remember to take into consideration the tax implications. There are strategies to minimize the tax impact of RMDs and it can be financially worthwhile to learn how to implement them. 

RMD Fact #4 – What happens if you don’t take a RMD 

You will have to pay a hefty fine. In addition to the RMD itself, you will have to pay an additional 50%. 

RMD Fact #5 – What if you make a mistake in calculating the RMD 

If you don’t take the requisite amount from your Self Directed IRA, sometimes it is possible to fix it. The correction involves communicating with the IRS and detailing the error in the calculation and then what steps are being taken to fix it. The IRS form which accompanies this communication is Form 5329. 

RMD Fact #6 – Taking RMDs from multiple retirement accounts 

If you have multiple Self Directed IRA accounts, you must calculate the RMD amount for each account separately. However, once you know the total amount that you need to distribute, you can take it from any of the accounts. This is not the case with a 401(k). Each 401(k) account needs a separate calculation, as well as a separate distribution. 

RMD Fact #7 – Combining RMDs from different years 

The IRS code mandates a minimum that your Self Directed IRA must distribute each year. However, it does not give any credit for going beyond that minimum. In other words, even if you withdraw in excess of the RMD amount in one year, you cannot apply that to the next year to minimize your RMD obligation. 

RMD Fact #8 – Distributions while a person is still working 

Normally working doesn’t affect your RMD obligations, i.e. you still have to take them. However, there is an exception for funds held in an employer’s 401(k) plan. If you are above 72 years of age and have a 401(k) account with your current employer, then you don’t have to take any RMDs from that account until April 1 pursuant to your retirement. 

RMD Fact #9 – IRS reporting requirements 

Ask your Self Directed IRA custodian about tax reporting. In most cases they will provide you with Form 1099-R which will outline any distributions. This can then be filed with your Federal tax return. 

RMD Fact #10 – Changes in RMDs due to Covid 

The CARES Act provided a temporary waiver for RMDs in 2020. However, that waiver has not been extended to 2021. Currently (2021) the standard RMD rules are in full effect.   

To find out more about RMDs and they can affect a Self Directed IRA, please schedule a call with a Madison specialist.