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Little-Known Rules And Strategies For Required Minimum Distributions From IRAs

Required minimum distributions (RMDs) from IRAs and other qualified retirement plans are more complicated than they need to be. There are a number of little-known rules that can be helpful to taxpayers or trap them into paying higher taxes or penalties.

Most people believe IRA stands for “individual retirement account.” But the tax code and the IRS label them “individual retirement arrangements.”

The basic rule for RMDs is that the owner (known as a participant) of a traditional IRA, 401(k), or other defined contribution retirement plan must begin RMDs by April 1 of the year after turning 72. But if you turn 70½ before 2019, your first RMD must be taken by April 1 of the year after you turn 70½. After the year you turn 72 (or 70½ for those who turned 70½ before 2020) distributions equal to the RMD must be taken by December 31 of each calendar year.  

Though the deadline for taking the first RMD is April 1, most people should take their first RMD by December 31 of the year they turn 72. That’s because they’ll have to take their second RMD by the end of the next year. If they wait for the April 1 deadline to take the first RMD, they’ll have two RMDs in that year. That potentially could push them into a higher tax bracket or increase the amount of Social Security benefits included in gross income or increase the Medicare premium surtax, also known as IRMAA.

The penalty for not taking the full amount of your RMD is 50% of the amount that should have been distributed from the IRA but wasn’t. That penalty is in addition to income taxes when the distribution eventually is made.


RMDs are not required for original owners of Roth IRAs or Roth 401(k)s.

The method for calculating an RMD is explained in my previous article and in IRS Publication 590-B, “Distributions from Individual Retirement Arrangements (IRAs).” The publication is available free on the IRS web site or by contacting the IRS at 800-829-3676.

Of course, you can distribute more than the RMD amount if you want to or need the money. But the excess above the RMD won’t be used as a credit or other reduction when you compute next year’s RMD. Next year, you’ll use the IRA balance as of December 31 of this year to compute the RMD. So, indirectly you receive a credit, because taking a larger distribution this year reduces the IRA balance and reduces the RMD for next year.

RMDs don’t have to be taken in a lump sum at the end of the year. You can take RMDs in any pattern you want. You can take fixed installments during the year or distributions at irregular intervals. Some people have their IRA custodians send them monthly checks of equal amounts that total at least the RMD for the year.

When you have more than one IRA, first you calculate the RMD separately for each IRA. Then, you have several options.

You can take the calculated RMD from each IRA.

Or you can add all the RMDs, known as aggregating them. Then, you can take the aggregated RMD from the IRAs in any proportion you want. The entire aggregated RMD can be taken from one IRA. It can be taken proportionally from each, or an equal amount can be taken from each IRAs. Or any other allocation you think of can be taken as long as the total at least equals the aggregate RMD for the year.

Some people use the aggregation method to rebalance their portfolios or make it easier to manage their IRAs in the future.

For example, suppose a person owns two IRAs, and one IRA owns predominantly stocks that have appreciated a lot and another IRA owns other investments that haven’t done as well. The owner can take all of the RMD from the IRA that owns mostly stocks. That brings the owner’s overall asset allocation closer to where it was at the beginning of the year so it is less overweighted to stocks.

Other people decide to simplify their financial lives by reducing the number of IRAs they have. So, they take all their RMDs from one IRA until it is depleted and can be closed.

The aggregation method can’t be used with 401(k)s and other employment-related accounts. For them, you compute the RMD separately for each account and have to take the RMD from that account.

When you take an RMD, you don’t have to sell an investment and distribute cash. You can have the IRA distribute shares of stock or mutual funds or whatever other investments it owns. You have to be sure the value of the property distributed at least equals the RMD for the year. The value of the property on the date of each distribution is used to compute the amount of the distributions for the year and is the amount included in gross income. It doesn’t matter if the value of the property appreciates or declines after the distribution date.

Taking a distribution of property instead of cash ensures that your money stays invested until you need to spend it.

When you take a distribution of property, the tax basis in the property is its fair market value on the date of the distribution. When you eventually sell the property, you’ll owe capital gains taxes only on the appreciation that occurred after the distribution.

You can spend or invest the RMD if the distribution was in cash. You can make a gift of the RMD after it is distributed.

Some people want to put their RMDs into another traditional IRA or a Roth IRA. But there are limited circumstances in which you can do that. First, if you do put the RMD in another retirement account, it is not a tax-free rollover. You have to include the RMD in gross income for the year.

The RMD amount can be used to make an annual contribution to an IRA if you meet the contribution requirements. A recent tax law eliminated the prohibition of traditional IRA contributions after age 70½. Now, you can make contributions to a traditional IRA or Roth IRA at any age.

But you can make IRA contributions only to the extent you have earned income for the year from a job or self-employment. So, most people taking RMDs won’t be able to make IRA contributions with the proceeds.

In addition, the IRA contribution annual limit applies, which is $7,000 in 2021 for taxpayers over age 50.

When you want to convert all or part of a traditional IRA to a Roth IRA, you first have to take any RMD for the year before converting any amount.

A qualified charitable contribution (QCD) can count towards all or part of your RMD for the year yet isn’t included in gross income. You can make QCDs up to $100,000 for the year.

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