Required Minimum Distributions: Year-End Issues

The end of the year is the deadline for most individuals with qualified retirement plans and IRAs to take their required minimum distributions (RMDs) if they have attained age 70' or inherited their benefits (Code Sec. 408(a)(9)). RMDs for 2015 are based on the account's value at the end of 2014. The failure to take RMDs can result in a 50% penalty (Code Sec. 4974). As part of its Tax Preparedness Series, the IRS reminded affected individuals to remember to take their RMDs by Dec. 31 (IR-2015-122, Oct. 29, 2015). Here are some key issues that can impact RMDs.

Those Who Turned 70'

Individuals who were born July 1, 1944, to June 30, 1945, attained age 70' in 2015. This means that they have attained their required beginning date for purposes of RMDs and must take their first one by Dec. 31, 2015. However, they can opt to postpone the first RMD until April 1, 2016. Doing so means taking two RMDs in 2016 (one by April 1 and one by Dec. 31).

Exceptions. For those who meet the age requirement but are still working, the first RMD with respect to qualified retirement plan benefits can be postponed until they leave employment (assuming the plan permits this action). However, this rule does not apply to anyone owning more than 5% of the company. The rule does not apply with respect to IRAs, regardless of company ownership.

Roth IRAs. The RMD rules do not apply for account owners during their lifetime.

Other Matters. An RMD does not have to be taken in a single withdrawal. All that is required is that the total amount withdrawn for the year at least equals the RMD amount. Withdrawals are not limited to the RMD amount; more or even all of the account can be withdrawn even though the owner has reached his or her required beginning date.

Figuring RMDs. Usually, for IRAs, the trustee or custodian shows the RMD amount in Box 12b of Form 5498, IRA Contribution Information. Thus, the 2015 RMD amount should have been shown on a 2014 Form 5498, which would have been issued to the IRA owner in January 2015. For qualified retirement plans, the administrator must compute the RMD and provide this information to the participant.

In computations of RMDs, all traditional IRA accounts can be aggregated with the annual sum withdrawn from one or more of the accounts. In computations of RMDs from qualified retirement plan, no aggregation is permitted; RMDs must be figured for and taken from each plan.

Qualified Direct IRA Transfers

Under a special rule, those age 70' or older by the end of the year can directly transfer up to $100,000 from their IRAs to a public charity, and such transfer is tax-free (Code Sec. 408(d)(8)). The transfer, called a qualified charitable donation (QCD), can include RMDs. Those who inherited an IRA can use this rule as long as they are at least age 70' by year-end. Married persons filing jointly can exclude $100,000 each (a total of $200,000 on a joint return). No charitable contribution deduction is allowed for the transfer. This direct transfer rule does not apply to SEP-IRAs, SIMPLE-IRAs, or Roth IRAs.

This rule, which was created by the Pension Protection Act of 2006, expired at the end of 2014. According to testimony before the House Ways and Means Committee, in the first two years that this rule was in effect, more than $140 million was given to charity. However, the rule has expired only to be extended several times before so it is likely that the rule will again be extended for 2015. Note that both the House, in February, and the Senate, in May, overwhelmingly passed the America Gives More Act of 2015 (Trade Facilitation and Trade Enforcement Act of 2015) (H.R. 644), which would make the QCD rule permanent. The Senate's version, Public Good IRA Rollover Act (S. 1159), has not been voted upon.

Tax Benefits of Qualified Direct IRA Transfers. By keeping the IRA distribution out of gross income, adjusted gross income (AGI) is minimized. This has the favorable effect of increasing eligibility to various other tax breaks based on AGI or modified AGI. For those who do not itemize, it is a way to benefit their favorite charities on a tax-advantaged basis. For all higher-income individuals, minimizing AGI in 2015 can translate into avoiding or minimizing the additional Parts B and D premiums for Medicare in 2017.

What to Do. Because this favorable tax rule has not yet been extended for 2015, there are certain strategies to consider now. Those who want to take advantage of this rule can make direct transfers now with these considerations in mind:

• If the law is extended, the tax-free treatment applies to the transfers.
• If the law is not extended, the distribution will be includible in gross income but if the individual itemizes deductions, then a charitable contribution deduction can be claimed for the direct transfers.

Those who want to adopt a wait-and-see approach should get ready for making a direct transfer by contacting the IRA's trustee or custodian. For example, the custodian may require the account owner to write a personal letter directing the custodian to make the transfer; it must specify the name of the public charity receiving the transfer along with its federal tax identification number.

Inherited Accounts

Those who recently inherited IRAs and qualified retirement benefits have decisions to make. There are actions to take that impact the taxation of inherited benefits. If the decedent died after age 70', his or her RMD for the year must still be taken; it is taxable on the decedent's final income tax return.

Surviving Spouses. They can treat the account as their own, allowing them to postpone distributions until they are age 70' and name their own beneficiaries. If they do not treat the account as their own, then they must take RMDs under the same rules applicable to non-spouse beneficiaries.

Non-Spouse Beneficiaries. They cannot roll over inherited accounts to their name as can surviving spouses. The account must be retitled property to reflect the decedent's name, date of death, and the beneficiary's name with the beneficiary designation. However, non-spouse beneficiaries can roll over inherited accounts (e.g., change brokerage firms for an IRA) as long as the accounts are registered properly.

No RMDs usually are required in the year of the decedent's death. Beneficiaries must begin their RMDs by Dec. 31 of the year following the year of death (e.g., Dec. 31, 2015, for a decedent dying in 2014). Here are the payout options:

• Begin RMDs based on the beneficiary's life expectancy. Life expectancy is found in IRS Publication 590-B, Appendix B, Table I (Single Life Expectancy). However, if the decedent died on or after attaining age 70', RMDs are based on the longer of the beneficiary's life expectancy (from the Single Life Expectancy table) or the decedent's life expectancy (usually Table III (Uniform Lifetime)). This rule is helpful in minimizing distributions to a beneficiary who is older than the decedent.
• Delay distributions but withdraw the entire account by the end of the fifth year following the year of the owner's death.

Beneficiaries under age 59' taking distributions from IRAs and qualified retirement plans are not subject to the 10% early distribution penalty (Code Sec. 72(t)(2)(A)(ii)).

Roth IRAs. While distributions from Roth IRAs are not taxable, inherited accounts are subject to the same distribution rules as those applied to IRAs and qualified retirement plans.

Withholding

For RMDs, other than for Roth IRAs and other accounts in which there is basis (the owner made after-tax contributions), taxable income results. Federal income tax is automatically withheld from distributions. A 10% withholding rate applies to non-periodic distributions (e.g., RMDs) unless the taxpayer wants no withholding. If the 10% withholding is not sufficient to meet projected tax liability, the individual can ask that an additional amount be withheld. Form W-4P, Withholding Certificate for Pension and Annuity Payments, is used to opt out of withholding or request additional withholding. Alternatively, the person can pay estimated taxes for projected tax liability on RMDs.

Conclusion

Those who must take RMDs for 2015 should determine their necessary withdrawals. As mentioned earlier, this can be done with the help of plan administrators and IRA custodians or trustees, or with the assistance of an accountant or other financial advisor. Individuals should also decide now how to receive their distributions (e.g., by check, transfers to taxable accounts), and advise plan administrators, custodians, and trustees accordingly.

Sidney Kess, CPA-attorney, is of counsel at Kostelanetz & Fink, consulting editor to CCH, author and lecturer.

The end of the year is the deadline for most individuals with qualified retirement plans and IRAs to take their required minimum distributions (RMDs) if they have attained age 70' or inherited their benefits (Code Sec. 408(a)(9)). RMDs for 2015 are based on the account's value at the end of 2014. The failure to take RMDs can result in a 50% penalty (Code Sec. 4974). As part of its Tax Preparedness Series, the IRS reminded affected individuals to remember to take their RMDs by Dec. 31 (IR-2015-122, Oct. 29, 2015). Here are some key issues that can impact RMDs.

Those Who Turned 70'

Individuals who were born July 1, 1944, to June 30, 1945, attained age 70' in 2015. This means that they have attained their required beginning date for purposes of RMDs and must take their first one by Dec. 31, 2015. However, they can opt to postpone the first RMD until April 1, 2016. Doing so means taking two RMDs in 2016 (one by April 1 and one by Dec. 31).

Exceptions. For those who meet the age requirement but are still working, the first RMD with respect to qualified retirement plan benefits can be postponed until they leave employment (assuming the plan permits this action). However, this rule does not apply to anyone owning more than 5% of the company. The rule does not apply with respect to IRAs, regardless of company ownership.

Roth IRAs. The RMD rules do not apply for account owners during their lifetime.

Other Matters. An RMD does not have to be taken in a single withdrawal. All that is required is that the total amount withdrawn for the year at least equals the RMD amount. Withdrawals are not limited to the RMD amount; more or even all of the account can be withdrawn even though the owner has reached his or her required beginning date.

Figuring RMDs. Usually, for IRAs, the trustee or custodian shows the RMD amount in Box 12b of Form 5498, IRA Contribution Information. Thus, the 2015 RMD amount should have been shown on a 2014 Form 5498, which would have been issued to the IRA owner in January 2015. For qualified retirement plans, the administrator must compute the RMD and provide this information to the participant.

In computations of RMDs, all traditional IRA accounts can be aggregated with the annual sum withdrawn from one or more of the accounts. In computations of RMDs from qualified retirement plan, no aggregation is permitted; RMDs must be figured for and taken from each plan.

Qualified Direct IRA Transfers

Under a special rule, those age 70' or older by the end of the year can directly transfer up to $100,000 from their IRAs to a public charity, and such transfer is tax-free (Code Sec. 408(d)(8)). The transfer, called a qualified charitable donation (QCD), can include RMDs. Those who inherited an IRA can use this rule as long as they are at least age 70' by year-end. Married persons filing jointly can exclude $100,000 each (a total of $200,000 on a joint return). No charitable contribution deduction is allowed for the transfer. This direct transfer rule does not apply to SEP-IRAs, SIMPLE-IRAs, or Roth IRAs.

This rule, which was created by the Pension Protection Act of 2006, expired at the end of 2014. According to testimony before the House Ways and Means Committee, in the first two years that this rule was in effect, more than $140 million was given to charity. However, the rule has expired only to be extended several times before so it is likely that the rule will again be extended for 2015. Note that both the House, in February, and the Senate, in May, overwhelmingly passed the America Gives More Act of 2015 (Trade Facilitation and Trade Enforcement Act of 2015) (H.R. 644), which would make the QCD rule permanent. The Senate's version, Public Good IRA Rollover Act (S. 1159), has not been voted upon.

Tax Benefits of Qualified Direct IRA Transfers. By keeping the IRA distribution out of gross income, adjusted gross income (AGI) is minimized. This has the favorable effect of increasing eligibility to various other tax breaks based on AGI or modified AGI. For those who do not itemize, it is a way to benefit their favorite charities on a tax-advantaged basis. For all higher-income individuals, minimizing AGI in 2015 can translate into avoiding or minimizing the additional Parts B and D premiums for Medicare in 2017.

What to Do. Because this favorable tax rule has not yet been extended for 2015, there are certain strategies to consider now. Those who want to take advantage of this rule can make direct transfers now with these considerations in mind:

• If the law is extended, the tax-free treatment applies to the transfers.
• If the law is not extended, the distribution will be includible in gross income but if the individual itemizes deductions, then a charitable contribution deduction can be claimed for the direct transfers.

Those who want to adopt a wait-and-see approach should get ready for making a direct transfer by contacting the IRA's trustee or custodian. For example, the custodian may require the account owner to write a personal letter directing the custodian to make the transfer; it must specify the name of the public charity receiving the transfer along with its federal tax identification number.

Inherited Accounts

Those who recently inherited IRAs and qualified retirement benefits have decisions to make. There are actions to take that impact the taxation of inherited benefits. If the decedent died after age 70', his or her RMD for the year must still be taken; it is taxable on the decedent's final income tax return.

Surviving Spouses. They can treat the account as their own, allowing them to postpone distributions until they are age 70' and name their own beneficiaries. If they do not treat the account as their own, then they must take RMDs under the same rules applicable to non-spouse beneficiaries.

Non-Spouse Beneficiaries. They cannot roll over inherited accounts to their name as can surviving spouses. The account must be retitled property to reflect the decedent's name, date of death, and the beneficiary's name with the beneficiary designation. However, non-spouse beneficiaries can roll over inherited accounts (e.g., change brokerage firms for an IRA) as long as the accounts are registered properly.

No RMDs usually are required in the year of the decedent's death. Beneficiaries must begin their RMDs by Dec. 31 of the year following the year of death (e.g., Dec. 31, 2015, for a decedent dying in 2014). Here are the payout options:

• Begin RMDs based on the beneficiary's life expectancy. Life expectancy is found in IRS Publication 590-B, Appendix B, Table I (Single Life Expectancy). However, if the decedent died on or after attaining age 70', RMDs are based on the longer of the beneficiary's life expectancy (from the Single Life Expectancy table) or the decedent's life expectancy (usually Table III (Uniform Lifetime)). This rule is helpful in minimizing distributions to a beneficiary who is older than the decedent.
• Delay distributions but withdraw the entire account by the end of the fifth year following the year of the owner's death.

Beneficiaries under age 59' taking distributions from IRAs and qualified retirement plans are not subject to the 10% early distribution penalty (Code Sec. 72(t)(2)(A)(ii)).

Roth IRAs. While distributions from Roth IRAs are not taxable, inherited accounts are subject to the same distribution rules as those applied to IRAs and qualified retirement plans.

Withholding

For RMDs, other than for Roth IRAs and other accounts in which there is basis (the owner made after-tax contributions), taxable income results. Federal income tax is automatically withheld from distributions. A 10% withholding rate applies to non-periodic distributions (e.g., RMDs) unless the taxpayer wants no withholding. If the 10% withholding is not sufficient to meet projected tax liability, the individual can ask that an additional amount be withheld. Form W-4P, Withholding Certificate for Pension and Annuity Payments, is used to opt out of withholding or request additional withholding. Alternatively, the person can pay estimated taxes for projected tax liability on RMDs.

Conclusion

Those who must take RMDs for 2015 should determine their necessary withdrawals. As mentioned earlier, this can be done with the help of plan administrators and IRA custodians or trustees, or with the assistance of an accountant or other financial advisor. Individuals should also decide now how to receive their distributions (e.g., by check, transfers to taxable accounts), and advise plan administrators, custodians, and trustees accordingly.

Sidney Kess, CPA-attorney, is of counsel at Kostelanetz & Fink, consulting editor to CCH, author and lecturer.