Retirement Q&A: Required Minimum Distributions

When you reach 70½ and you have IRAs or certain other tax-deferred retirement accounts, the IRS requires you to take out some of the money to begin paying the taxes. Failure to make a mandated withdrawal, called a required minimum distribution, or RMD carries a tax penalty of 50 percent on the amount to be taken out. Because many accounts were hit hard by the drop in the stock market over the past year, the government approved a one-year waiver of the withdrawal requirement. Here are four questions about required minimum distributions and the IRS answers:

Q: How does the 2009 RMD waiver affect someone who turns 70½ this year?

A: That person does not have to take money out of their account to pay the taxes, which would have been required if the law had not passed. The waiver does not change RMDs required for 2010, which means the account owner who turned 70½ this year is required to take a required distribution by Dec. 31, 2010.

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Q: Can someone who has several retirement accounts just withdraw the required amount from one account instead of separately from each?

A: An IRA owner must calculate the RMD separately for each account, but can withdraw the total amount from one or more of the IRAs. The same applies to tax-sheltered annuities used frequently by teachers called 403(b)s. However, RMDs required from other types of retirement plans, such as a 401(k) and deferred compensation plans called 457(b)s have to be taken separately from each of those accounts.

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Q: What happens if a person does not take a required distribution by the IRS deadline?

A: If an account owner fails to take out a required distribution or doesn’t take out the full required amount by the deadline, the amount not withdrawn is taxed at 50 percent. The account owner must file IRS Form 5329, Additional Taxes on Qualified Plans and Other Tax-Favored Accounts, with the federal tax return for the year in which the full amount of the RMD was not taken.

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Q: Aside from the special waiver provided by law this year, can the penalty for not taking the full RMD ever be waived?

A: Yes, the penalty may be waived by the government if the person can prove a reasonable error was made and that reasonable steps are being taken to remedy the shortfall. Individuals must explain to the satisfaction of the IRS in a letter why the payment wasn’t made.