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With the first group of Baby Boomers turning age 70 ½ this year, there is a whole new group of IRA owners who will begin taking required minimum distributions (RMDs). It is important that they know the rules about aggregating RMDs in order to avoid this frequent mistake made by individuals, advisors, and even IRA custodians and employer plans.
You can aggregate your RMDs – some of them. All RMDs should be calculated separately. IRA RMDs can then be added together and taken from any one or group of IRAs. The IRA group includes SEP and SIMPLE IRAs. You can also do the same with 403(b) accounts. Those are the only RMDs that can be aggregated.
Here is what you cannot do. You can never take an RMD for one type of retirement account from a different type of retirement account. For example, you cannot take a 401(k) RMD from an IRA or an IRA RMD from a 403(b) account. We see this mistake all too often. Each employer plan must calculate and distribute its own RMD, except for 403(b) accounts as noted above.
In addition, you cannot aggregate RMDs from IRAs that you own with RMDs from accounts you have inherited. You can aggregate RMDs from accounts that are inherited from the same person, as long as the RMD calculation is using the same life expectancy factor. When would you use different factors? If you inherit one IRA directly, but inherit another IRA owned by the same person through their estate, then you would be using a different life expectancy factor for each inherited IRA. Or you inherit one IRA from a parent and a second IRA from a sibling who inherited it from the same parent.
What happens when you take an RMD from the wrong account? It means you have to take another distribution of the RMD amount from the “right” account. If you discover the problem during the tax year, you have no problems other than taking more than necessary from your retirement account.
If you don’t discover the problem until the following tax year, you now owe the 50% penalty, yes that’s right - 50%, on the amount you did not take. This penalty is reported on Form 5329, which should be filed with your tax return for the year of the missed distribution.
Now for the good news. If you missed the tax return deadline, the form can be filed as a standalone return.
But wait, there’s more good news. IRS has the authority to waive the penalty for good cause – once you have taken that missed RMD. Complete Form 5329, enter “RC” next to line 54, make sure line 55 reflects only any additional tax you owe – not including what you are asking to be waived, and include a note explaining what happened and requesting the waiver. Most of the time, IRS waives the penalty.
It is important that you do not ignore this mistake. Form 5329 is considered a tax return. If it is not filed, then the statute of limitations does not start to run on this transaction. If IRS finds the error, they can assess the penalty, failure to file penalties, and accuracy related penalties, and interest on all these penalties. And, all those penalties fall on you, the IRA owner, even if someone gave you bad advice.
Don't Make This Common RMD Mistake - It's a Big Penalty!