Answers to Questions About Required IRA Distributions

I get a lot of questions from readers this time of year about the rules for taking required minimum distributions, as people scramble to make their decisions before the December 31 deadline. Here are answers to some questions I’ve received recently:

How much time does it take to process my RMD?

You technically have until December 31, 2012, to take your required minimum distribution, but IRA administrators generally ask that you allow some extra time to process the transaction. For example, Fidelity recommends taking your RMD by about December 15, especially if you have special requests -- such as transferring some of your RMD to a charity or other third party, which requires a signature guarantee.

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What happens if I miss the December 31 deadline for taking my RMD?

You could get stuck with a big penalty if you miss the deadline -- 50% of the amount you should have withdrawn but didn’t.

How do I calculate my RMD if I have several IRAs and 401(k)s? Do I have to calculate the RMD on each account separately?

The rules are different for IRAs and 401(k)s. For IRAs, you calculate your required distribution by adding up the balances in all of your traditional IRAs (Roths don’t have RMDs) as of December 31, 2011, then dividing that number by the IRS life expectancy figure for someone your age. You can take your RMD from any of your traditional IRA accounts or take it all from one account. For 401(k)s, you need to do the same calculation for each account and take the required amount from each account.

You can get life expectancy numbers in the appendix to IRS Publication 590 (most people should use Table III, the Uniform Lifetime table, unless your sole beneficiary is your spouse and he or she is more than ten years younger than you). Or you can use our RMD calculator. Your IRA plan administrator will usually help you with the calculations, too.

I’m over age 70½ and still working. Do I need to take RMDs from my accounts?

Yes, you need to take required minimum distributions from your IRAs starting in the year after you reach age 70½, whether or not you’re still working. But if you’re still working for the employer who sponsors your 401(k) plan, you may not need to take an RMD from that 401(k) -- the rules vary by plan. You will need to take the RMD from your 401(k) if you own more than 5% of the company, even if you haven't retired yet, says Ken Hevert, vice-president of retirement products at Fidelity. You also need to take RMDs from former employers’ 401(k)s starting the year after you reach age 70½.

I turned age 70½ this year. Do I need to take my RMD by December 31?

You get an extension in the year you turn 70½ -- until April 1, 2013. But you’ll need to take your second RMD, for age 71, by December 31, 2013. Be careful before you decide to take advantage of the extension; if you take both RMDs in the same year, you could bump up to a higher tax bracket.

People who turned 70½ last year need to keep those rules in mind, too -- if you took advantage of the extension and took your first RMD by April 1, 2012, you have to take your second RMD by December 31, 2012.

Can I give my RMD to charity tax-free this year?

As of mid December, Congress had not yet extended the law permitting people over age 70½ to make tax-free transfers of up to $100,000 from their IRA to charity. In the past, Congress has extended the law at the very last minute, so it could still be approved this year. See Charitable Gifts From IRAs and the RMD for a strategy to get credit for a tax-free transfer if Congress extends the law, without running the risk of missing the December 31 deadline.