Welcome back. In Tips for Improving Your RMD Process – Part 1 of 2, we shared some tips to help you improve the processing of your required minimum distributions (RMD). Remember these distributions are required whether your account is a Self-Directed IRA or not. Here are few more tips to help you with the RMD process.
Tip 3: Rollover to Avoid RMD When Appropriate
The required minimum distribution (RMD) rules do not apply to Roth IRA owners. As such, if you have assets in a Traditional IRA, SEP IRA or SIMPLE IRA and you do not want to withdraw RMD amounts each year, you can convert those IRAs to a Roth IRA. Caution: For a conversion to a Roth IRA other factors must be considered; primarily, whether a Roth IRA is more suitable for you. Ideally, a Roth IRA analysis would need to be done beforehand to determine suitability. Please contact us if you have questions about Roth IRA conversions.
You can also rollover your Traditional IRA, SEP IRA and SIMPLE IRA to a qualified plan, 403(b) or governmental 457(b) so as to avoid being subject to the required minimum distribution (RMD) rules. Of course, this would work only if you are still employed by an employer that sponsors a qualified plan, 403(b) or governmental 457(b) under which you can defer beginning your RMD past age 70½ until retirement.
Caution: If you are at least age 70 ½ during the year that you plan to convert amounts to a Roth IRA or rollover amounts to a qualified plan, 403(b) or governmental 457(b) plan, you must take your RMD for that year before doing the conversion or rollover. Failure to follow this rule will result in an ineligible conversion or rollover of your RMD amount, which could result in penalties being owed to the IRS if not corrected timely.
Tip 4: Schedule RMD In advance
Generally, your RMD for the year can be calculated as early as January 1. This provides you with sufficient time to put measures in place that would help to prevent missing your required minimum distribution (RMD) deadline. Most financial institutions allow IRA owners to schedule distributions in advance. For instance, if you want your RMD to be processed on November 15, you can submit the instructions as early as January 2. If you choose to do so, follow-up to make sure sufficient cash is available to cover your requested amount.
Tip 5: Refigure Your IRA RMD Amount
Your RMD amount for the current year is determined by dividing the fair market value (FMV) of the IRA as of the previous year-end, by your distribution period for the current year. Your custodian is required to either provide you with the calculated amount of your RMD, or calculate the amount upon request. However, they are allowed to make certain assumptions that could result in the calculation being incorrect.
For example, if you converted an amount to a Roth IRA last year and recharacterized the amount this year, the recharacterized amount must be included in the FMV for the Traditional IRA. However, since that amount was not in your Traditional IRA at year-end and would therefore not be reflected in your FMV, it must be manually added when doing the calculation. Your IRA custodian will usually use the FMV on record as of year-end, instead of making the adjustments, resulting in the calculated amount being less than your true required minimum distribution (RMD) amount.
Ultimately, you are responsible for ensuring that your RMD calculation takes such adjustments into consideration. If a mistake is made, you would be responsible for paying the excess accumulation penalty. We highly recommend that you consult with a professional to help you develop the best course of action for your required minimum distributions (RMD).
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