THE FISCAL BLUE PRINT
WITH COACH JEFF MONTGOMERY
A Rundown on RMD’s: Misconceptions & Mistakes to Avoid
On today’s show, we are going to go over some common misconceptions and mistakes folks make when it comes to taking their RMD’s from their IRAs.
Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to advise clients. So, unless you’re a client I can’t give you advice because I don’t know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser.
(0:30) Practical Planning segment: We have a subject that’s near and dear to Joani’s heart: Required Minimum Distribution’s, otherwise known as RMD’s!
This show was triggered by a listener’s question that came in a few weeks ago and this particular listener was getting pretty creative with some tax planning and postponing their RMDs. Let’s the question below:
(2:00) Listener Question: I have an idea I have been thinking about and could you tell me if this works or not. I have turned 72 this year in 2021 and I know, based on the Secure ACT, I will have to take an RMD this year. However, I also know I am allowed to postpone my first RMD until April 1st of 2022. I was thinking about postponing my 1st RMD until that date and complete a Roth conversion this year in 2021? I did not want to do anything until I got some advice first. What say you?
Here’s the short answer: No, that will not work. Why?
- Can you do a Roth conversion after 72? YES! However, the first funds out of an IRA are always the RMD. You cannot roll over an RMD into a Roth IRA.
- If you tried to do this it would be considered an excess contribution into the Roth.
So that question got me thinking about other folks out there with the same or similar questions and some common mistakes we see with RMD’s.
(7:45) One potential mistake I could see happening related to this first question when postponing your first RMD. In the previous example, let’s say you postpone your first RMD in 2021, what happens in 2022? You must take 2 RMD’s for that year, correct?
Well, guess what? It’s not highly publicized yet but they are changing the RMD tables next year.
These new tables are effective for RMDs beginning on January 1, 2022. The old tables will still apply for 2021 and no RMDs were required for 2020 due to the (CARES) Act.
The tables were last updated in 2002 so the IRS reviewed the mortality tables and has essentially changed them which allows slightly lower RMD’s.
(10:20) The Uniform Lifetime Table is the most commonly used. It is used to determine lifetime RMDs to most plan participants over the age of 72; including when a spousal beneficiary is a sole designated beneficiary but who is not over 10 years younger than the account owner or when the spouse is not the sole designated beneficiary.
The Uniform Lifetime Table is also used to calculate distributions required for an individual who has inherited a tax-deferred retirement account from their spouse and has selected to transfer the account into their own name.
The Joint and Last Survivor Table is only used to determine RMDs to plan participants over the age of 72 when a spouse is a sole designated beneficiary and who is over 10 years younger than the account owner.
(13:00) The Single Life Table after the SECURE Act will be used by a newly defined class of beneficiaries called Eligible Designated Beneficiaries. Eligible designated beneficiaries are defined as spouses, disabled or chronically ill individuals, minor children of the account owner/participant, or someone who is no more than 10 years younger than the account owner/participant.
Otherwise, in this example, it is the NEW 10 YEAR RULE.
Also, why we are here let’s clear up a recent IRS mistake in Publication 590. The writer or writers of the recently released draft of publication 590 misinterpreted the 10-year rule in the SECURE ACT. The writer said a non-spouse beneficiary would have to use the Single Life table and then have the entire amount withdrawn by year 10.
This was incorrect! They are now on record saying the publication was wrong and the actual example they gave (I think on page 12) was incorrect.
There are NO RMD’s for 9 years and 364 days and the entire account must be withdrawn!
(18:45) And that brings us to the next potential mistake that could be made:
If you missed an RMD and are charged the 50% penalty it is not cumulative (It doesn’t compound on itself) except when the RMD equals the entire IRA. So, when is that ever the case? The 10-year rule. But could this happen? Could you owe more than the actual IRA? No, but they would take the whole IRA.
What about Roth IRAs? Fix a missed RMD; file form 5329. But use the correct form from the tax year you missed the RMD. You may have to file an amended return as well.
(22:20) How about using an “in-kind” transfer to satisfy the RMD instead of just a simple distribution. How does that work?
This one is interesting, and we don’t often run into this. However, it is possible to use an ‘in-kind’ transfer to satisfy an RMD. Basically, you are transferring the investment shares to another account that equal the amount of the RMD.
You’re not escaping the taxes. It will still be reported as a distribution with a 1099 R, but you have moved the actual shares into a personal brokerage account (typically at the same custodian.)
So now those shares are in a personal account that is hopefully growing and earning dividends each year. However, it is also a taxable account so you would owe taxes each year on those dividends and possible capital gains.
But where the mistake could be made is what do you use as your cost basis on those shares that transferred to the Personal Brokerage account?
- The value of those shares on the day it was transferred in kind. Not what you originally bought those shares for in the IRA account.
- So really your cost basis is the amount reported on the 1099R you received from the IRA account.
(25:50) Coachable Segment:
Check and then double-check your RMD’s with your advisor and/or your custodian. If you have a question, always ask!
Why? Because the IRS says it is up to you to take the correct RMD. It is not up to your custodian or Advisor. They can tell you how much is required to be taken out of the account they manage but what if you have other IRA accounts that they don’t know about?
It is ultimately up to you to take out the correct amount.
From our experience (although the IRS is portrayed as EVIL) if you have made a good faith attempt and simply made an error or your custodian made an error, they are usually pretty lenient and will waive the penalty if corrected when discovered.
Again, you may have to file an amended return and send in form 5329.
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