Quiz: Do You Know These RMD Tax Facts?

c. The minimum amounts that must be withdrawn are calculated based on the account value and the taxpayer’s life expectancy.

The required minimum distribution (RMD) rules essentially require taxpayers to begin withdrawing funds from IRAs when they reach age 72. The minimum amounts that must be withdrawn are calculated based on the account value and the taxpayer’s life expectancy, determined using IRS actuarial data.

Despite this, there are ways that individuals can minimize their RMDs in the years prior to attaining age 72 if they will have no immediate need for the funds at that time. For example, many individuals can reduce their RMDs by converting a portion of their traditional IRA funds into Roth funds.

Required minimum distribution amounts cannot be rolled over into another tax-deferred account.

True

False

True

The basic purpose of RMDs is to trigger a taxable event, and thus rolling the money into another tax-deferred account is generally not allowed.

For those concerned about the tax implications of future RMDs, another potential mitigation strategy is to purchase a qualified longevity annuity contract. QLACs are a relatively new annuity product that is purchased within the IRA, deferring annuity payouts until the taxpayer reaches old age.

The value of the QLAC is excluded from the account value when calculating the RMDs, though the taxpayer is limited to purchasing a QLAC with an annuity premium value equal to the lesser of 25% of the account value or $145,000 (for tax year 2022).

Which law most recently made changes to the rules surrounding the starting age for required minimum distributions?

a. The Setting Every Community Up for Retirement Enhancement Act of 2019

b. The Tax Cuts and Jobs Act of 2017

c. The Consolidated Appropriations Act of 2022

a. The Setting Every Community Up for Retirement Enhancement Act of 2019, also known as the Secure Act.

The Secure Act, enacted on December 20, 2019, made significant changes in required minimum distribution rules for all qualified plans. Among these updates was the addition a new Subsection (H) to IRC Section 401(a)(9), which changed the mandatory start date for RMDs from age 70.5 to age 72 for distributions made after December 31, 2019. Importantly, the change applies only to individuals who attain age 70.5 after that date.

Sources say follow-up legislation referred to as Secure 2.0 could be made law during the current lame-duck session in Congress.

What is the size of the excise tax penalty assessed by the IRS when an individual fails to make a required minimum distribution from a qualified plan or IRA?

a. 10%

b. 25%

c. 50%

c. 50%.

In addition to the qualification implications, if an amount distributed from a plan is less than the RMD, an excise tax equal to 50% of the shortfall generally is levied against the individual.

The tax may be waived if the payee establishes to the satisfaction of the IRS that the shortfall is due to reasonable error and that reasonable steps are being taken to remedy the shortfall.

IRA distributions are subject to the 3.8% net investment income tax.

True

False

False

Also known as the Medicare contribution tax, the 3.8% net investment income tax was imposed under the Affordable Care Act.

The tax equals 3.8% of the lesser of a taxpayer’s net investment income for the taxable year, or the excess (if any) of the taxpayer’s modified adjusted gross income for the year, over a threshold amount of $200,000 for a taxpayer filing an individual return and $250,000 for a taxpayer filing jointly.

Notably, while taxable distributions from traditional IRAs are not subject to the net investment income tax, they do increase a taxpayer’s modified adjusted gross income for the year. A higher MAGI may expose taxpayer’s other investment income to this 3.8% tax.

What is the impact on a tax-qualified employer-sponsored retirement plan when required minimum distributions are not timely made?

a. There are no specific consequences for the plan; only the taxpayer faces penalties.

b. The failure to pay RMDs automatically and irrevocably triggers tax disqualification for the entire plan.

c. The failure means a plan is technically subject to full disqualification, but such failures can be corrected through the IRS Employee Plans Compliance Resolution System.

c. The failure means a plan is technically subject to full disqualification, but such failures can be corrected through the IRS Employee Plans Compliance Resolution System.

For a defined contribution plan, the correction prescribed is to distribute the required minimum distributions, including earnings from the date of the failure to the date of distribution

The amount that must be distributed for each year a required minimum distribution was not made is determined by dividing the adjusted account balance on the applicable valuation date by the application distribution period. The adjusted account balance is the actual account balance on the applicable valuation date, reduced by the total missed distributions for prior years.

How are required minimum distribution rules applied to tax-sheltered annuities, for example of the type held in a 403(b) plan?

a. Such tax-sheltered annuities are not subject to any required minimum distributions.

b. Such tax-sheltered annuities are generally subject to the same RMD ruleset applying to 401(k) style defined contribution plans and IRAs, as elucidated under IRC Section 401(a)(9).

c. Tax-sheltered annuities have their own special section in the Internal Revenue Code detailing the applicable RMD rules.

b. Such tax-sheltered annuities are generally subject to the same RMD ruleset applying to 401(k) style defined contribution plans and IRAs, as elucidated under IRC Section 401(a)(9).

Tax-sheltered annuities, including custodial accounts and church retirement income contracts, are subject to minimum distribution rules set forth in IRC Section 401(a)(9), both in form and operation.

With some exceptions, Section 403(b) annuity contracts are treated as IRAs for purposes of applying the minimum distribution requirements. Regulations finalized in 2007 address a number of issues concerning the application of these rules to tax-sheltered annuities.

No special rules or exceptions apply to an IRA that is inherited by a surviving spouse following the death of the original account owner.

True

False

False

The surviving spouse qualifies as an eligible designated beneficiary, so the pre-Secure Act distribution “stretch” rules continue to apply.

While a surviving spouse may elect to treat an inherited IRA in the same manner as a non-spousal beneficiary, a surviving spouse of an IRA owner who is the sole beneficiary of an IRA and who has an unlimited right to make withdrawals from the IRA may also elect to treat the entire account as his or her own IRA. This election can be made at any time after the IRA owner’s death.

Post-Secure Act, surviving spouses qualify as eligible designated beneficiaries, so the pre-Secure Act distribution rules continue to apply. Under regulations proposed in 2022, spousal beneficiaries will be required to elect to treat the deceased spouse’s IRA as their own by the later of (1) December 31 of the year following the year of the owner’s death or (2) age 72.

What are an IRA trustee’s reporting requirements with respect to required minimum distributions?

a. There are no specific reporting requirements defined by law or regulation.

b. There are two related but distinct reporting requirements imposed on IRA trustees — one to the IRA owner and one to the IRS.

c. There is only a requirement to report the anticipated RMD to the account owner.

b. There are two related but distinct reporting requirements imposed on IRA trustees — one to the IRA owner and one to the IRS.

If a minimum distribution is required with respect to an IRA for a calendar year and the IRA owner is alive at the beginning of the year, the trustee that held the IRA as of December 31 of the prior year must provide a statement to the IRA owner and the IRS by January 31 of the calendar year.

The reporting requirements apply only to lifetime distributions. The IRA owner is presumed not to have a spouse more than 10 years younger than the owner, and no reporting is required for after-death distributions or for Roth IRAs.

How are minimum distribution requirements calculated if an individual owns more than one IRA?

a. The annual RMD must be calculated separately for each IRA, but the total for a category (Roth or non-Roth) may be taken from any one or more of the IRAs within the same category.

b. The annual RMD must be calculated separately for each IRA, and the total required distribution must be drawn equally from all accounts.

c. The annual RMD is calculated based only on the largest IRA owned by the individual, but it can be withdrawn from any one or more of the IRAs.

a. The annual RMD must be calculated separately for each IRA, but the total for a category (Roth or non-Roth) may be taken from any one or more of the IRAs within the same category.

This rule requires aggregation of amounts that an individual is required to take as the IRA owner and a separate aggregation for amounts that an individual is required to take as the designated beneficiary of a decedent’s IRA.

Amounts taken as an IRA owner may not be aggregated with amounts taken as a beneficiary for purposes of meeting the minimum distribution requirements. Similarly, distributions from 403(b) contracts or annuities may not be aggregated with IRA distributions to meet the distribution requirements for either type of account.