1. General Rule
As a general rule, the account balance used for calculating required minimum distributions (RMDs) is the prior year-end account balance, with no adjustments.
For example, if you are calculating an RMD for 2017 you would use the 2016 year-end account balance. If you are calculating a missed RMD for 2014, you would use the 2013 year-end account balance. If you have your first RMD due for 2017 and you take that RMD in March of 2018, you still use the 2016 year-end account balance.
As usual with retirement distribution rules, there are some exceptions to the general rule.
2. Rollovers or Transfers
The first exception is for funds in transit on the last day of the year. This is the most common adjustment. If you take funds out of your IRA or employer plan at the end of the year and roll them over to an IRA or plan (within 60 days) in the following year, then the amount of the funds in transit must be added back in to the 12/31 account balance. You cannot get out of an RMD by withdrawing and redepositing funds. You must also add funds back in if you do a transfer from one retirement account to another and the funds are not included in either account on the last day of the year.
If you have done a Roth IRA conversion in one year and you recharacterize it in the following year, the amount of the recharacterization must be added to the year-end account balance of the receiving IRA. A recharacterization treats the funds as if they never left the IRA and if they never left the IRA then they must be part of the RMD calculation for the year. Makes sense, right?
4. Excess QLAC Contributions
This is a relatively new, and so far rare, adjustment. If a client’s qualifying longevity annuity contract (QLAC) is overfunded, the excess must be returned to the non-QLAC portion of the IRA. It must also be added back in to the prior year-end account balance for calculating the RMD.
5. Prior-Year RMDs
When you miss taking an RMD for one or more years and are now making up the distributions, there is no adjustment to the prior-year end IRA account balance for the missed IRA RMD amount. You can adjust employer plan year-end account balances for the missed RMD amount.
For example, you missed a $10,000 IRA RMD in 2016. You take that RMD in 2017. You cannot reduce your 2016 IRA year-end account balance by $10,000 when you calculate your 2017 IRA RMD. You miss a $15,000 403(b) RMD in 2016. You take out the $15,000 in 2017. You can reduce your 403(b)’s 2016 year-end account balance by $15,000 when calculating your 2017 RMD.
6. Still Working Exception to RMDs
A question we frequently get occurs when an individual is still working and has no RMDs from their employer plan. During the year they move some plan funds to an IRA where they do have an RMD for the year. What balance is used to calculate the RMD? You are going to use the IRA’s prior year-end account value. The plan funds have no RMD for the year. Moving them to an IRA does not change that. They are not part of the prior year-end account balance and is not one of the required adjustments to the IRA year-end account balance.
By Beverly DeVeny