What Are RMDs (Required Minimum Distributions)?

An RMD is a “required minimum distribution” and typically they must be received by the end of the tax year. Taxpayers born before July 1, 1945, generally must receive these minimum payments from their individual retirement arrangements (IRAs) and workplace retirement plans by Dec. 31, 2015.  That means right now, this year!  If not, the penalty is 50 percent plus the individual tax rate that applies.  Can you imagine paying 75 percent of this money in tax?  The IRS is very serious about getting their money before you get any older than 71 years of age, so if you were born before July of 1945, get to your CPA now!
The IRS has laid out the following rules regarding distribution of retirement account funds:  
Owners of traditional, Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs but not Roth IRAs while the original owner is alive. They also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.
An IRA trustee must either report the amount of the RMD to the IRA owner, or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2015 RMD, this amount is on the 2014 Form 5498 normally issued to the owner during January 2015.  So if a person was to roll their 401(k) over to an IRA, the previous Trustee is responsible to calculate the RMD.
A special rule allows first-year recipients of these payments, those who reached age 70 1/2 during 2015, to wait until as late as April 1, 2016, to receive their first RMDs. What this means is that those born after June 30, 1944, and before July 1, 1945, are eligible. The advantage of this special rule is that although payments made to these taxpayers in early 2016 can be counted toward their 2015 RMD, they are taxable in 2016.
The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by Dec. 31. So, for example, a taxpayer who turned 70 1/2 in 2014 (born after June 30, 1943, and before July 1, 1944) and received the first RMD (for 2014) on April 1, 2015, must still receive a second RMD (for 2015) by Dec. 31, 2015.
The RMD for 2015 is based on the taxpayer’s life expectancy on Dec. 31, 2015, and their account balance on Dec. 31, 2014. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. For most taxpayers, the RMD is based on Table III (Uniform Lifetime Table) in IRS Publication 590-B. For a taxpayer who turned 72 in 2015, the required distribution would be based on a life expectancy of 25.6 years. A separate table, Table II, applies to a taxpayer whose spouse is more than ten years younger and is the taxpayer’s only beneficiary. If you need assistance with this, don’t hesitate to call.
Though the RMD rules are mandatory for all owners of traditional, SEP and SIMPLE IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions; however, there may be a tax on excess accumulations. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.
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Now that we have discussed RMD’s, and you have a general idea of what is required, stay tuned for breaking news on a new RMD rule that will allow a person to defer their payments until age 85. Stay tuned.