The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Michigan is representative of a common inquiry involving the withdrawal of required minimum distributions (RMDs) from retirement savings arrangements. The advisor asked:
My 73-year-old client, who has several IRAs and retirement plans, claims he does not have to take an RMD for the year. Could that be true?
Highlights of the Discussion
• Maybe; the answer depends on several factors. However, because your client could face a 50% IRS penalty for failing to take an RMD when required, you are right to double check on his RMD status. Whether your client must take an RMD for the year depends on his age and the type of retirement account or accounts he has. If there is any question with respect to RMDs, your client should consult his tax advisor and his IRA and plan administrator.
• If he is a participant in a DC or DB plan, continues to work for the employer sponsoring the plan and is not an owner of the business, he may be able to delay taking an RMD from the plan until he retires, if the plan document permits the delay. However, if he is no longer working for the employer sponsoring the plan, he would be required to take an RMD if he had a prior year-end account balance.
• Generally, if he owns a traditional, savings incentive match plan for employees (SIMPLE) or simplified employee pension (SEP) IRA, he would be required to take an RMD if he had a prior year-end account balance.
• If he owns a Roth IRA, he would not be required to take an RMD from the account.
• If he is a beneficiary of any type of IRA (including a Roth IRA), he may be required to take an RMD depending on the distribution options for beneficiaries under the IRA plan agreement.
• If he is a beneficiary of a DC or DB plan, he may be required to take an RMD depending on the distribution options for beneficiaries as outlined in the plan document.
• If he is a 403(b) plan participant and continues to work for the organization sponsoring the plan, he may be able to delay taking an RMD until he retires, if the plan document permits. If he is no longer working for the organization sponsoring the 403(b) plan, he would have to take an RMD if he had a prior year-end account balance that consisted of post-1986 amounts. He would not be required to take an RMD based on his prior year-end account balance that is attributable to pre-1987 accruals until reaching age 75.
Conclusion
As you can see, whether a person is required to take an RMD for the year depends on a myriad of factors. Financial advisors who understand those factors set themselves apart from the average advisor and are better positioned to support their clients.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2012 Columbia Management Investment Advisers, LLC. Used with permission.
