Many employees and annuitants are focusing their attention to the filing deadline of their 2018 federal tax returns. That filing deadline is April 15, 2019.
But there is another deadline coming up sooner than the April 15 deadline that may affect some employees and annuitants. April 1, 2019 is the deadline for employees and annuitants born between July 1, 1947 and June 30, 1948, to take their first required minimum distribution (RMD) from their traditional IRAs and/or qualified retirement plans.
The RMD rules apply to traditional IRAs, Simplified Employee Pension (SEP) IRAs, Simplified Incentive Matching Plan for Employees (SIMPLE) IRAs, 401(k) plans, 403(b) plans, 457(b) plans, the Thrift Savings Plan (TSP) and profit-sharing plans. The first year RMD rules are discussed in this column.
It is important to first review the general RMD rules.
An individual cannot keep qualified retirement pan and traditional IRA funds in his or her account indefinitely. The individual generally has to start taking withdrawals from a traditional IRA, SIMPLE IRA, SEP IRA, or qualified retirement plan account when the individual reaches age 70.5. However, Roth IRAs do not require withdrawals until after the death of the Roth IRA owner.
An RMD is the minimum amount that an individual must withdraw from his or her account(s) each year. Note the following:
(1) An individual is allowed to withdraw more than the RMD each year; and
(2) RMD withdrawals are included in one’s taxable income, except for any part that was taxed before such as the after-taxed contributions made to a nondeductible traditional IRA.
What is the beginning date for the first RMD?
Traditional IRAs – this includes both deductible and nondeductible traditional IRAs, SEP IRAs and SIMPLE IRAs, have a first RMD deadline of April 1 of the year following the calendar year the traditional IRA owner becomes age 70.5. 401(k), 403(b), profit sharing plans and the TSP – this includes both the traditional and Roth TSP – have a deadline of April 1 following the later of the calendar year in which the retirement plan owner reaches age 70.5 or retires.
The reason that the beginning date for the first RMD is somewhat different for retirement plans is that if any individual participates in a qualified retirement plan or the TSP and continues to work for the employer sponsoring the retirement plan or the federal government (which sponsors the TSP) past age 70, then there is no RMD requirement for that plan until the employee retires.
However, that is not the case with a traditional IRA. An individual who works past age 70 and contributes to a retirement plan such as the TSP is still subject to RMD rules for traditional IRAs. The individual is also subject to RMD rules for qualified retirement plans that he or she previously participated in but no longer does after leaving or retiring from the employer sponsoring the plan.
What is the date an individual reaches age 70.5?
An individual reaches age 70.5 on the date that is exactly six calendar months after his or her 70th birthday. The following examples illustrate:
Example 1. Howard is retired and his 70th birthday was June 30, 2018. Howard reached 70.5 on Dec. 30, 2018. Howard must take his first traditional IRA RMD for 2018 by April 1, 2019.
Example 2. Julie is retired and her 70th birthday was July 1, 2018. Julie reached age 70.5 on Jan. 1, 2019. Julie does not have a traditional IRA RMD for 2018. She must take her first RMD for 2019 by April 1, 2020.
How is the RMD calculated?
The RMD for any year is the IRA or retirement plan account balance as of December 31st of the immediately preceding calendar year, divided by a distribution period form the IRS’ Uniform Lifetime Table. A separate table, found in IRS Publication 590-B, is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the IRA or retirement plan owner. The following worksheet is used to calculate the current year’s RMD for one’s traditional IRA unless a spouse is the sole beneficiary of the IRS and he or she is more than 10 years younger than the IRA owner.
Deadline for receiving required minimum distribution
- Year you turn age 70. 5 – by April 1st of the following year
- All subsequent years – by December 31 of that year
The following examples illustrate:
Example 1 – Howard from above computes his 2018 IRA RMD as follows:
1 – IRA total balance on Dec. 31, 2017: $548,000
2 – Distribution period from the table above for the year 2018 in which Howard becomes age 70: 27.4
3 – Line 1 divided by line 2. This is Howard’s 2018 IRA RMD that must be taken by April 1, 2019: $20,000
Note that if Howard owns multiple traditional IRAs, he is computing his IRA RMD is based on the total IRA balance, but Howard can make his $20,000 RMD from any of his traditional IRAs. Howard must make his 2018 IRA RMD by April 1, 2019. He must make another RMD during 2019 – his 2019 IRA RMD – no later than Dec. 31, 2019. In making his 2019 IRA RMD, Howard would use the total traditional IRA balance as of Dec. 31, 2018 and a distribution period of 26.5, since Howard becomes age 71 during 2019.
Example 2 – Julie from above computes her 2019 IRA RMD as follows:
1 – IRA total balance as of Dec. 31, 2018: $795,000
2 – Distribution period from table above for the year 2019 in which Julie becomes age 71: 26.5
3 – Line 1 divided by line 2. This is Julie’s 2019 IRA RMD that must be Taken by April 1, 2020: $30,000
Note that even though Julie has until April 1, 2020 to take her 2019 IRA RMD, she should consider taking her 2019 IRA RMD before Jan. 1, 2020. In so doing, Julie will avoid having to take two RMD’s in 2020, one for 2019 and one for 2020. Taking two RMDs within the same calendar year resulting in additional income may result in Julie being pushed into a higher marginal tax bracket. Also, the additional income may result in Julie having to pay more for Medicare Part B in the next year. What an individual pays in monthly premiums for Medicare Part B in a given year depends on their income from the previous year. The same logic applies to Howard above.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER®, Chartered Life Underwriter, Chartered Financial Consultant, Registered Health Underwriter and Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019