IRA Mistakes on RMD – Part 2 by Paul Ferraresi

IRA RULES
One of the benefits of IRAs is that RMDs for multiple IRA accounts can be aggregated. This includes SEP and Simple IRA accounts. The RMD should be calculated for each account separately, but after that, the RMD amounts can be added together and taken from any one or a combination of accounts.

403(b) ACCOUNTS
A similar aggregation rule exists for 403(b) accounts. A person with more than one 403(b) account can calculate the RMD for each account and then add the RMDs together. The total can then be taken from one or a combination of 403(b) accounts.

EMPLOYER PLANS
RMDs from employer plans, not including 403(b) plans and SEP and Simple IRAs, cannot be aggregated. A person with multiple 401(k), governmental 457(b) or other employer plans must calculate the RMD for each individual plan and take that RMD from that plan only.

ROTH IRAs
There is no need to worry about whether Roth IRA RMDs can be consolidated because Roth IRAs have no RMDs during the account owner’s lifetime. It can’t get much simpler than that.

Any plan making a series of substantially equal payments over a period of 10 years or more, or over life expectancy, cannot aggregate that payment with the RMD from any other retirement account. The distribution from the account making these substantially equal payments is considered the RMD from the account only.

The following is a practical example:

What Happens When a Person Gets RMD Aggregation Wrong?

There are two potential penalties when people make RMD aggregation mistakes: the penalty for excess contributions and the penalty for missed RMDs.

THE 6% PENALTY
RMDs that are rolled over to another retirement plan create an excess contribution in the receiving account, which must be corrected as soon as possible.

When an excess contribution is corrected by Oct. 15 of the year after the year for which the contribution was made, the amount of the excess plus or minus the gains or losses attributable to the amount of the excess contribution must be removed from the account as well.

Excess contributions that are not corrected are subject to a penalty of 6% per year for every year they remain in the account. Form 5329 should be filed with the IRA owner’s tax return to report the excess contribution and to calculate the 6%.

THE 50% PENALTY
When a distribution is taken from the wrong type of account, you have a missed RMD. For example, suppose a person accidentally takes the 403(b) RMD from his IRA. This is against the rules. The person has a missed RMD in the 403(b). The penalty for a missed RMD is a steep one – it is 50% of the amount not taken.

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