The 12 Tax Days of Christmas: Day 10

Clearing up confusion about RMDs.

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Rather than your true love sending you a partridge in a pear tree, wouldn’t you appreciate some money-saving ? For my year-ending 12 Tax Days of Christmas series, I’ll dig back into the archives of previous topical columns to reiterate understandable, realistic and legitimate tax strategies that you need to implement now in order to have a much smaller tax bill come April 15.

For the 10th tax day of Christmas, let's turn our focus to those over 70 1/2 with traditional IRAs, or those who have inherited an IRA. Anyone in either of those two groups is required to take a required minimum (RMD) from their account each year. The deadline for RMDs is December 31. If you miss the deadline and don’t follow the rules, there is a hefty penalty of 50 percent on the amount you should have taken. In other words, if you don’t distribute the money to yourself form your IRA in time, the will take half of it to penalize you.

These distributed funds are subject to tax and need to be included on your personal tax return. Let’s take an example to illustrate how the rule works. Sally is 72 and is required to take RMD each year. She has an IRA with $250,000 in it. According to the distribution rules (see IRS Publication 590), she will need to distribute $9,765 by the end of the year. This equates to about 4 percent of her account value. Next year, she will re-calculate this annual distribution amount based on the account's value and her age. Once you know how to calculate the RMD, determining the distribution amount is relatively easy. However, the rules of when RMD applies and to what accounts can be confusing. To help sort out the confusion, I have outlined some facts and fictions that every retirement account owner should know about RMDs. 

Related: The 12 Days of Tax Christmas: Day 9


  • There are no RMDs for Roth IRAs. Roth IRAs are exempt from RMDs. Even if you are 70/12 or older, you’re not required to take distributions from your . Why is that? Because there is no tax due when you take a distribution from your Roth IRA. As a result, the government doesn’t really care whether you distribute the funds or not, as they don’t receive any tax revenue.
  • Be careful with inherited IRAs. The rules are complex, and many different situations apply when you inherit an IRA or Roth IRA. For example, beneficiaries who inherit Roth IRAs must take RMDs. Make sure to talk with your advisor and complete additional research to know the rules if you inherited that valuable IRA.
  • RMDs can be taken from one IRA to satisfy RMD for all IRAs. While each account will have an RMD amount to be distributed, you can total those amounts and satisfy that total amount from one IRA. It is up to you. So, for example, if you have a self-directed IRA with a property you don’t want to sell to pay RMD and a brokerage IRA with stock you want to sell to pay RMD, then you can sell the stock in the brokerage IRA and use those funds to satisfy the RMD for both IRAs. You can’t combine RMD though for 401(k) and IRA accounts -- only IRA to IRA or 401(k) to 401(k).
  • Mind the 50 percent excise-tax penalty. There is a 50 percent excise-tax penalty on the amount you failed to take as RMD. So, for example, if you should’ve taken $10,000 as RMD but failed to do so, you will be subject to a $5,000 excise-tax penalty. Check back next month, when I will summarize some measures and relief procedures you can take if you failed to take required RMD.
  • Delays apply for 401(k) account holders still working for a 401(k) employer. If you have a 401(k) with a current employer and are still working for that employer, you can delay RMD for as long as you are still working there. This exception doesn’t apply to former employer 401(k) accounts, even if you are otherwise employed.


  • RMDs are due by filing of tax return. Some may think they can make 2019 RMD distributions until the tax return deadline of April 15, 2020. Wrong. While you can make 2019 IRA contributions up until then, RMD distributions must be completed by December 31, 2019.
  • Roth 401(k)s are not subject to RMDs. Wrong. While Roth IRAs and Roth 401(k)s are both tax-free accounts, the RMD rules apply differently. As I stated above, Roth IRAs are exempt from RMD rules. However, Roth 401(k) owners are required to take RMDs. Keep in mind, you could roll your Roth 401(k) to a Roth IRA, and thereby you would avoid having to take RMD. But if you keep the account as a Roth 401(k), then you will be required to start taking RMD at age 70 1/2. The distributions will not be subject to tax, but they will start the slow process of removing funds from the tax-free account.
  • RMD must be taken in cash. Wrong. RMDs may be satisfied by taking cash distributions or by taking a distribution of assets in kind. While a cash distribution is the easiest method, you may also satisfy RMD by distributing assets in kind. This may be stock or or other assets that you don’t want to sell or that you cannot sell. This doesn’t occur often, but some self-directed IRA owners will end up holding an asset they don’t want to sell because of current market conditions (e.g. real estate), and they decide to take distributions of portions of the real estate in-kind in order to satisfy RMD. This process is complicated and requires an appraisal of the assets being distributed and partial deed transfers (or partial LLC-membership interest transfers, if the IRA owns an LLC and the LLC owns the real estate) from the IRA to the IRA owner. While this isn’t the recommended course to satisfy RMD, it is a potential solution to IRA owners who are holding an asset, who have no other IRA funds to distribute for RMD and who wish to only take a portion of the asset to satisfy their annual RMD.

Related: The 12 Tax Days of Christmas: Day 8

As one can see, the RMD rules are complicated and it is easy to make a mistake. Also, the penalty for a mistake is serious. Make sure you get together with your tax advisor if you fall into this critical tax-law requirement. The only good news may be that once you know how the RMD rules apply in your situation, it is generally going to apply in the same manner every year thereafter, with only some new annuak calculations based on your age and account balances.

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