Required Mandatory Distributions can be a tricky annual task if you have multiple retirement accounts. Your retirement plan custodian will generally calculate your RMD each year based on the year end balance in your IRA accounts (not from your Roth account which is not subject to RMD requirements). If you have multiple accounts, you’ll receive multiple RMD letters based on each account. To make things easier on you, you are permitted to aggregate all of your IRA account RMD’s and take the distribution from one IRA account. If possible, you can make it easier on yourself by consolidating those accounts so you receive one IRA RMD amount each year. It complicates things if you have defined contribution plan like a 403(b) or401(k), or an inherited IRA. From those accounts the RMD must be calculated separately and the distribution must be taken from each respective type of account. An exception is if you have more than one 403(b) tax-sheltered annuity account, you can total the RMDs and then take them from any one (or more) of the tax-sheltered annuities.
Miscalculating your RMD can have significant consequences. You will pay ordinary income taxes on the amount withdrawn, and potentially state income taxes (unless the amounts you’re withdrawing were from non-deductible contributions you’ve made over your lifetime, in which case you would have had to file Form 8606 to let Uncle Sam know the status). Taxes are expected, but you want to avoid incurring a 50% penalty on insufficient or late withdraws. So if you were supposed to take out $4,000, and you only took out $2,000, you’ll need to pay 50% of $2,000 in penalties – that’s on top of the ordinary income tax you will owe. That’s why I always tell clients to err on the side of taking more out of their IRA’s if they’re not sure. One way or another Uncle Sam is going to get their share, it’s best not to give them a 50% penalty if you can take simple steps to avoid it. And don’t think that RMD missteps only happen to those of us 70 ½ or older. If you inherited an IRA, no matter how old you are, you need to start taking distributions by Dec 31st the year after the person who left it to you died.