RMDs: Special SituationsSubmitted by Mission Financial Planning on August 29th, 2016
COVID-19 UPDATE: As of 3/28/2020, RMDs can be suspended for 2020 for those who prefer to leave that money invested.
Updated for the new SECURE Act: For any individual born after June 30, 1949, the required beginning date for Required Minimum Distributions (RMDs) is April 1 of the year after the year in which such individual reaches age 72 (or, in the case of certain plans, if he or she is still working, after the year in which he or she retires if later). Previously, the trigger age was 70½.
There are some special situations that affect Required Minimum Distributions (RMDs) that you may need to be aware of; having a younger spouse, inheriting an IRA, holding an illiquid asset, having a late-in-the-year birthday and working past age 72 can all impact the required distributions.
A spouse who is 10 years younger
You may remember that the RMD is calculated by dividing your retirement assets by your life expectancy. When a spouse is the sole beneficiary and is more than 10 years younger than you, there is a different divisor that can be found on the IRS Joint Life and Last Survivor Expectancy table. This allows for smaller RMDs with the purpose of allowing the money to last longer to benefit the younger spouse.
RMDs on an Inherited IRA
Under the SECURE Act, most non-spouse beneficiaries must withdraw the balance of the inherited IRA within 10 years. An exception exists for minor children and those who are chronically ill or no more than 10 years younger than the deceased IRA owner. In those exceptions, the RMD can be calculated over a lifetime.
Roth IRAs are not subject to RMDs during the owner’s lifetime, and a spousal beneficiary is not required to make them either. When there is a non-spousal beneficiary on a Roth, the same withdrawal rules apply as with traditional IRAs, as well as the same exceptions.
RMDs on Illiquid Investments
What if you have an illiquid investment in an IRA? You can aggregate that IRA balance with the other liquid IRAs, calculate the RMD, and pay the RMD from an IRA that holds liquid assets.
This can become an issue if the illiquid investment is the only investment in vehicle that is required to make its own RMD (for instance, 401(k)s and beneficiary IRAs are not allowed to be aggregated with traditional IRAs). We have retired clients who hold an illiquid partnership in their 401(k). Because of the rule that the 401(k) must pay its own RMD, they have had to keep other, liquid assets in the 401(k) for the express purpose of paying the annual RMD.
Working past age 70/72:
If you’re still working, you do not have to take an RMD from your 401(k) as long as you don’t own more than 5% of the company. However, you are still required to take RMDs from your IRAs.
Some of the RMD rules are complex, and specific to individual circumstances, and the penalties are significant. Work with your advisor, or give us a call, to be sure of what's required.