IRA Required Minimum Distributions (RMDs): What You Need to Know
If you own an Individual Retirement Account (IRA), you may have annual tax obligations related to Required Minimum Distributions (RMDs).
Many taxpayers assume that the bank or investment firm automatically handles these requirements. In reality, the responsibility ultimately rests with the taxpayer.
This page explains when RMDs may apply and what information we may need from you when preparing your tax return.
For more background and details, see this article: Required Minimum Distributions (RMDs) – What U.S. Expats in Israel Need to Know – Cole & Waxman Tax Services
What Is a Required Minimum Distribution?
Under U.S. tax law, IRA owners and certain IRA beneficiaries must withdraw a minimum amount each year from retirement accounts once they reach the applicable starting age, or after inheriting an IRA.
These withdrawals are called Required Minimum Distributions (RMDs).
If the required amount is not withdrawn by the applicable deadline, the IRS may impose a penalty on the shortfall.
Under current law:
- The penalty is generally 25% of the amount that should have been withdrawn, and
- It may be reduced to 10% if the error is corrected promptly.
Your Responsibility
It is the taxpayer’s responsibility to determine:
- Whether an RMD is required for the current year, and
- Whether the correct amount has been withdrawn by the deadline.
Financial institutions may provide estimates, but they do not always calculate the correct amount, particularly when multiple accounts or inherited IRAs are involved.
Traditional, SEP, and SIMPLE IRAs
Owners of Traditional, SEP, and SIMPLE IRAs generally must begin taking RMDs once they reach the required age under current law.
To determine whether an RMD is required and how much must be withdrawn, we may need the following information:
- Confirmation of whether you reached RMD age during the tax year
- The December 31 balance of each IRA from the prior year
- The total distributions taken during the current year
If you would like our assistance calculating your RMD, please provide:
- IRA statements showing December 31 year-end balances for the prior year
- Distribution confirmations for the current year
- Note – this is outside the scope of the standard tax preparation agreement. Your tax accountant will let you know what fees apply for this additional service.
Inherited IRAs
Inherited IRAs are subject to special distribution rules, and these rules vary depending on several factors, including:
- Whether the original IRA owner died before or after their Required Beginning Date
- Your relationship to the deceased
- Whether you qualify as an Eligible Designated Beneficiary
For inherited IRAs, please provide the following information:
- Date of birth of the original IRA owner
- Date of death
- Your relationship to the deceased
- December 31 account balances for each year
- Distributions taken during the year
Failure to comply with inherited IRA distribution rules may also result in penalties.
Note – this is outside the scope of the standard tax preparation agreement. Your tax accountant will let you know what fees apply for this additional service.
Roth IRAs
Roth IRA owners generally do not have lifetime RMD requirements.
However, beneficiaries of inherited Roth IRAs may still be required to take distributions.
Additional IRS Guidance
The IRS provides detailed information on Required Minimum Distributions here:
IRS Required Minimum Distribution FAQs
https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
Disclaimer
Service
Our preparation of your tax return does not automatically include monitoring or calculating your RMD obligations.
If you would like our assistance reviewing or calculating your RMD requirements, please submit the relevant IRA statements and notify our office.
Educational Disclaimer
The information on this page is provided for general educational and informational purposes only. It is not intended as tax, legal, or financial advice and should not be relied upon as a substitute for advice from a qualified professional.
Tax rules relating to retirement accounts can be complex and depend on each taxpayer’s specific circumstances. You should consult your personal tax advisor or accountant for guidance regarding your individual situation.