Tax Tip Tuesday: Important Date Approaching for Older Clients with IRAs and Qualified Plan Accounts

March 29, 2016

 

A critical date is approaching for many clients who turned age 70½ in 2015.


By April 1, 2016, these clients must start making required minimum distributions (RMDs) from their traditional IRAs. Lifetime distributions are not required to be taken from Roth IRAs at any age.

 

A participant in a qualified retirement plan must begin taking distributions by April 1st of the calendar year following the later of the year in which s/he reaches age 70½ or retires (except for 5% owners, who are subject to the same rules as IRA owners).


The April 1st required beginning date is critical because failure to begin RMDs could expose the taxpayer to a penalty tax equal to 50% of the difference between the amount that should have been withdrawn and the amount that was withdrawn. 

 

However, the penalty may be waived if the shortfall in the distribution was due to reasonable error and reasonable steps are being taken to remedy it.

 

Important Rules:

  • Attainment of age 70½ - A taxpayer turns age 70½ as of the date that is six months after the 70th anniversary of his birth.

  • Multiple IRAs - If your client has several traditional IRAs, the RMD amount is calculated separately for each IRA. However, the RMD amounts for the separate IRAs may be totaled and the aggregated RMD amount may be paid out from any one or more of the IRA accounts. Roth IRAs aren't included.

  • Qualified charitable distributions and RMDs - Taxpayers who are age 70½ or older may make tax-free distributions to a charity directly from an IRA of up to $100,000 per year. These distributions, called qualified charitable distributions, aren't subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a deduction on the taxpayer's return. Such distributions aren't included in the taxpayer's gross income, but they are taken into account in satisfying their RMD for the year. How these are treated for Iowa after 2015 is still unknown.

     

     

     

     

     

     

     

     

     

Disclaimer: The items included in the Tax Tip Tuesday Video Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advise contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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