Make sure your clients understand that nonqualified, similar to Roth IRAs, are accounts, plans or annuities that are originally funded with after-tax dollars. Unlike Roth IRAs, however, the earnings or gains may be taxed at the time of withdrawal or during accumulation.
All retirement plans don’t have the same RMD required beginning dates. Traditional IRAs, SEP IRAs and SIMPLE IRAs require first RMD by April 1 of the year following the year the IRA owner turns age 70½, regardless if employed. Qualified plans such as pensions, profit-sharing, and 401(k)s, 403(b) plans, and governmental 457(b) plans have the RMD required beginning date (RBD) at the later of retirement or age 70½.
403(b) plans are a bit more complex. Contributions and earnings after 1986 are subject to RMDs at the later of retirement or age 70½. Balances as of 12/31/86 are subject to RMDs at the later of retirement or age 75. Also, there are a few exceptions such as for 5 percent owners.
Calculating The RMD
To calculate an RMD, your client would take the value of the tax-deferred retirement plan or IRA as of December 31 last year, and divide it by their life expectancy factor. That amount equals their RMD.
The Internal Revenue Service (IRS) provides life expectancy tables to use in the calculation. These include Joint and Last Survivor Table, Uniform Lifetime Table and Single Life Expectancy Table. Clients should use the table that properly applies to their situation. The IRS publishes these tables in their publication 590-B, “Distributions from Individual Retirement Arrangements,” and also provides worksheets to help with the calculations.
Although the IRA provider is required to either provide an estimated RMD amount or offer to calculate the RMD amount for your client, your client bears the ultimate responsibility for ensuring the correct amount is distributed to them. For this reason you may want to encourage them to consult a CPA or other tax professional.
Tax Implications
RMDs with traditional IRAs have several tax implications that your clients should consider. Traditional IRAs basically have three stages for distributions to the IRA owner:
1. Early distributions—the distributions that occur prior to the IRA owner turning age 59½. These may be subject to an early distribution 10 percent federal additional tax unless an exception applies.