Advisor Connections Newsletter™
March 29, 2016
RMD Deadline Reminder
Reminder: April 1st Deadline for Initial RMDs for 2015
Hello Friends and Colleagues:
Although we are in the middle of tax season, do not forget that pesky required minimum distribution (RMD) deadline on April 1st for clients who turned 70.5 in 2015. Any RMDs not taken by the required date are subject to a 50% penalty, not including taxes otherwise due.
For clients who are older than 70.5, distributions from their qualified retirement accounts are mandatory. Part of the bargain of getting tax-deferred treatment on contributions to traditional IRAs and other retirement accounts is the money must be used during retirement years. The RMD is based on the account balance at the end of the prior year. The end-of-year balance is applied to the corresponding IRS table to compute the RMD amount that must be withdrawn. These distributions are subject to federal and state income tax (with the exception of Roth IRAs) and custodians are required to report the minimum distribution and actual distribution to the IRS. Any shortfall is assessed the 50% penalty.
Normally, RMDs are required to be withdrawn by the end of each year. However, the first RMD deadline (which is the distribution for the year the participant turns 70.5) can be deferred until April 1st in the year following the year the participant turns 70.5. For example, if a participant turned 70 on July 4, 2014 and 70.5 on January 4, 2015, their first RMD must be withdrawn by April 1, 2016. This RMD will be based on the account value as of December 31, 2014, because, even though the RMD can be withdrawn in 2016, it is still the RMD for 2015.
Although the IRS is generous is granting an extended deadline for the initial RMD, this could potentially lead to an unfavorable tax result. Waiting until April 1st of the following year to take the initial distribution means there will be two RMDs taken in the same year (one from the prior year, and one for the current year). This double distribution can push the participant-taxpayer into a higher tax bracket, and potentially impact Medicare costs, social security benefits, or other income-based programs. However, depending on the client’s personal situation, it might make sense to wait until the April 1st deadline. The bottom line is that there are a lot of planning opportunities in the time surrounding the first RMD.
For questions regarding coordinating qualified plans with a client’s trust or estate plan, do not hesitate to reach out to us. We can be reached by calling (216) 236-6480 or by emailing Scott Williams or Joseph Ferraro.