2. Normal distributions occur between ages 59½ and 70½. RMDs are not required yet and there is no 10 percent federal additional tax.
3. After age 70½ required minimum distributions (RMDs) start.
If your clients fail to take their RMD, the federal government will impose a 50 percent excise tax for the amount not taken.
The RMD amount will be taxed as ordinary income. That means the withdrawals will be added to your client’s total taxable income for the year, taxed according to their individual federal income tax rate, and may also be subject to state and local taxes.
If your clients have an IRA and made nondeductible contributions, their RMD is based on the total value of the IRA. The RMD calculation is not affected by whether amounts in the IRA are pre-tax or after-tax.
Keep in mind: an increase in income could put your clients in a higher tax bracket and impact the taxes they pay on their Social Security or benefits or cause their Medicare premiums to increase. Your clients should consult their tax advisor for questions about their specific tax situation.
Different Plans, Different Rules
There are some exceptions to RMD rules for certain plans, and a working exception is one of them. If your clients are participating in a qualified plan with their employer and the plan allows it, they can delay their first RMD until the year they retire. If your client uses the working exception and eventually retires, their RMD is due the year they retire. If they use the working exception and terminate employment for any reason, their RMD is due their last year of employment—even if their last day is December 31!
Some exceptions are: If the plan does not allow for extended RBDs or if the individual owns 5 percent or more of their employer company, then RMDs must be taken for the year they turn age 70½.
Note that there are special rules for 401(k) plans. There is an age 70½ exemption if an individual is still working and they are not required by the IRS to take RMDs from their current employer’s plan. However, the taxpayer must take their RMD at age 70½ from any previous employer’s plans, all traditional, SEP and SIMPLE IRAs owned as well as applicable RMD arrangements.