Halloween has passed, so it is now time to turn our attention to what must be done before the end of the year. It is now required minimum distribution (RMD) question time.
Your client, or you, have both an employer plan and an IRA. You have calculated the RMD amount for both accounts. The investments are doing poorly in one account and are doing well in the other. Can you take both RMDs from the account where the investments are doing poorly and preserve the balance in the account that is doing well? NO, you cannot.
You can never satisfy an RMD for one type of account with a distribution from a different type of account. You cannot take a 401(k) RMD from an IRA. You cannot take an IRA RMD from a 403(b).
If you have done this in the past, there is an excess accumulation in the account that did not make a required distribution. Excess accumulations are subject to a penalty of 50%. This is not a typo. The penalty is 50%.
The penalty is reported on Form 5329. The penalty can be waived by IRS for good cause. The excess accumulation (the RMD amount not taken) must be removed. Then Form 5329 can be filed with a letter requesting a waiver of the penalty. Before doing all of this, it is a good idea to consult with an advisor with some expertise in this area. There is a listing of Ed Slott trained advisors on our website, www.irahelp.com.
A word of caution here. IRS has ruled, and courts have upheld, that if the Form 5329 is not filed it is treated as though a return has not been filed. The statute of limitations does not start and IRS can go back and assess the 50% penalty, plus interest and failure to file penalties at any time. It is in the best interests of all involved to properly correct any missed RMDs.
-By IRA Technical Consultant Beverly DeVeny and Jared Trexler