Required Minimum Distribution From Two or More IRA Accounts

Remember to include that rollover IRA from 20 years ago.

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If you are saving for retirement with a traditional individual retirement arrangement, you probably know that the Internal Revenue Service will require you to begin taking required minimum distributions somewhere around age 70 1/2. In fact, you must take your first RMD by April 1 following the year you turn age 70 1/2 and by December 31 in subsequent years. If you have more than one IRA, you will have to calculate carefully to ensure you don't incur a penalty for skipping your RMD.

RMD Calculation

RMDs are based on your life expectancy using your age at the end of the year for which you are taking the distribution, but using the account balance at the end of the prior year. So, if you turned age 70 in early 2012, you would have to take a distribution for that year, and you would use age 70 to determine your life expectancy and your IRA account balance as of Dec. 31, 2011. If you have multiple IRAs, the IRS requires you to add all your accounts together and then divide the total by your life expectancy from the appropriate table. Otherwise the savvy investor would calculate RMD based on the smallest account, thus extending the tax benefits for as long as possible.

Includable Accounts

When you calculate your total required minimum distributions from your IRAs, you will need to include all of your personal IRA accounts. That means you need to add together all of your traditional IRA accounts along with any Simplified Employee Pension, or SEP IRA, accounts, along with any Savings Incentive Match Plan for Employees, or SIMPLE, IRA accounts that you may have built through employment or self-employment. Also, don't forget any rollover IRAs you might have set up when you rolled over money from a former employer's plan. In many cases, your plan trustee or custodian will do the calculation for you, but it is your responsibility to make sure you combine all the required RMDs for the year. If you do not calculate accurately, you will be liable for a penalty of 50 percent of the amount that was not distributed. IRA owners are not required to take RMDs from a Roth IRA, so you would not include a Roth IRA in your calculation.

Distribution Options

Although you must add together all your IRA accounts when you calculate your RMD, you can take the required amount from any plan, or combination of plans, you choose. For example, in the interest of eliminating fees, you might take your total RMD from one plan so you could close it out. If one plan is getting better investment returns, you might try to avoid taking distributions from that one as long as possible to gain the most benefit. You cannot use distributions from a Roth IRA to satisfy the traditional IRA RMD requirement, however.

IRA Beneficiaries

Non-spouse beneficiaries of an IRA will have to choose between taking a full distribution within five years or taking RMDs beginning the year after the deceased owner's death, based on the beneficiary's life expectancy. For beneficiaries the RMD requirement applies to both traditional and Roth IRAs. In addition, beneficiaries of a traditional IRA may have to calculate the deceased owner's RMD for the year of death if the original owner didn't take it before death. Spouse beneficiaries have more options, including treating the IRA as their own. Beneficiaries of multiple IRAs would, like IRA owners, add them together for the purposes of calculating RMDs. In the rare situation where you might inherit both a Roth and a traditional IRA, you should contact your plan custodian and/or tax advisor on calculating RMDs.