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Denise Appleby, APA, CISP, CRPS, CRC®, CRSP – IRA Strategies for Mistakes Prevention Expert

Denise Appleby, APA, CISP, CRPS, CRC®, CRSP – IRA Strategies for Mistakes Prevention Expert

By Denise Appleby, CISP, CRC®, CRPS, CRSP, APA, President of Appleby Retirement Consulting, Inc.

Editor’s note:
The following transcript of a recent live professional development webinar provides tremendously practical tips for advisors and their clients to help navigate traditional IRA distributions. This presentation was delivered in live webinar format in 2014. Denise’s comments have been edited for clarity and length.

You can view brief YouTube clips of the original presentation here.

You may also choose to take the full length course and earn 1 CRC®, CFP®, and/or PACE CE credit.



From a general perspective, we’re going to be looking at some transactions that must be completed by the end of the year in order for your clients to benefit from these provisions. I was speaking with some clients yesterday and I told them about this presentation.  One of my clients said to me, what’s the big deal if someone misses a deadline?  They can just do that transaction in January.  We’re going to show today why that is not the case.  If an individual misses some of these deadlines they will miss opportunities for tax advantage solutions, there could be IRS penalties, and there could be recapture tax and IRS assessed interest on some of the transactions.

Required Minimum Distributions (RMDs)

The first topic we want to talk about is required minimum distributions (RMDs).  If you’ve been in the retirement plan field for a year or more it’s very likely that you have heard about the required minimum distribution rule, but I’m finding out that not many people understand how this rule works and the penalties that could apply if individuals do not understand the rules and miss their deadlines.  What is a required minimum distribution? By definition, a required minimum distribution is a minimum amount that must be withdrawn from a retirement account for a year.  Until an individual reaches age 70 1/2, distributions are usually optional.

I’m emphasizing “usually” because there usually are some exceptions.  Generally speaking, if an RMD is due for a year, it must be withdrawn by December 31 of the year for which it is due.  Now the question becomes, who is subject to this required minimum distribution rule?  Generally speaking, individuals who are at least age 70 1/2 and older, and beneficiaries.  You’ll hear me say “generally speaking” a lot because when we discuss the rules that apply to IRAs, there is almost always an exception to the general rule.  It is important to note that the RMD rules do not apply to Roth IRA owners, and you’ll see me have owners underlined here because it does apply to beneficiaries of Roth IRAs.

That’s one of the mistakes that are usually made by, unfortunately, some retirement account owners and some professionals as well.  They think that because RMD rules do not apply to Roth IRA owners, they do not apply to beneficiaries, and that is not the case.  So, the beneficiary rules that we’re going to be talking about here today do apply to Roth IRAs.

Required Beginning Date

There is an exception to that rule for the year that the individual reaches age 70 1/2.  That’s the first RMD rule.  I’m not sure why they provided an exception here, but I’m assuming that when they discussed this regulation that the idea was this is their first year, maybe they’re not used to the rule yet so let’s cut these IRA owners some slack.  Under this exception, if someone reaches age 70 1/2 this year, they do have the option of deferring the RMD for this year until April 1 of next year.  Now, if the assets are in a qualified plan, such as a 401(k) plan, a 403(b), or a governmental 457(b) plan, and the individual is still working for the employer that offers that plan, the RMD can be deferred past age 70 1/2 until retirement.

In that case, the required beginning date, which is the year for which the first RMD must be withdrawn, can be deferred until April 1 of the year following the year of retirement.  I want to add a cautionary note here.  The option to defer RMDs past age 70 1/2 applies only if the individual is not a 5 percent owner.  If you have a client who has assets in, say, a 401(k) plan you want to find out whether or not that individual has any ownership in the business because if they do it is possible that they do not have the option to defer.  This usually applies to small business owners.

For those who are still employed by large companies and have assets in their 401(k) plan or a 403(b) plan we want to check with the employer to see whether or not the option to defer applies to that particular plan.  Because while it is allowed under the regulation, the employer does have the option to determine whether or not they want to extend that courtesy to their particular retirement plan. Never assume that because regulations allow it, it is allowed under your client’s 401(k) plan or pension  plan.  Always recommend that your client check with the employer to determine whether or not the exception applies.

This option to defer past age 70 1/2 does not apply to IRAs.  That’s one of the most asked questions I get about this option to defer, so remember that it does not apply to IRAs.  If your clients have assets in IRAs they must start taking their RMDs for the year that they reach age 70 1/2.

If you meet with a client who is considering deferring the RMD for the first year until the following year, one of the factors that must be taken into consideration is, “How will that affect the client from an income tax perspective?”  It’s all about which method, which option, which retirement account will allow the client to pay the least amount of income tax.  This is no different.

Required Minimum Distribution Calculations

If the calculation is wrong, it could result in the retirement account owner withdrawing less than the RMD amount.  From a general perspective the math seems very easy.  You divide the fair market value for the previous year by the applicable life expectancy or distribution period.  When you’re determining the life expectancy, you use the IRS’ Uniform Table, which assumes that the beneficiary is ten years younger than the retirement account owner.  But, there’s one exception to this and that exception applies to cases where the retirement account owner’s spouse is the sole primary beneficiary and is more than ten years younger than the retirement account owner.

In that case, we can use the Joint Life Expectancy Table which produces a lower RMD amount.  Another question I usually get is, “Which age is used to calculate the RMD amount?”  It’s a little bit tricky.  If you’re calculating the RMD for this year, you use the fair market value for the end of last year, and so for many people they think that you use the life expectancy for last year but you don’t.  If you’re calculating RMD for this year you use the age that the individual reaches at the end of the year.  So if someone is 75 today but they will be 76 by the end of the year, then you want to use age 76.

Let’s look at the case study. John was born in 1943.  His beneficiary is his daughter, Sally, and she was born in 1971.  We’re going to be using the Uniform Lifetime Table, because the rule says we always use that table unless the exception applies.  Even though she was born in 1971, we’re going to assume that she is just ten years younger than John and we’re going to be using John’s fair market value for December 31, 2012, which is $100,000.  To calculate John’s RMD for 2013 we use his life expectancy for 2013 and his December 31, 2012 fair market value.  To determine his life expectancy, we use his age as of December 31, 2013.

If you look at the Uniform Lifetime Table it shows that his life expectancy or distribution period is 27.4, so we’re going to divide $100,000 by 27.4, which produces an RMD of $3,650 for John, and that’s the amount he needs to withdraw for 2013.  Now, John’s RMD for 2013 is $3,650, but remember, John reached age 70 1/2 this year, so because this is his first RMD year he does have the option to defer taking that amount until as late as April 1 of the next year.  But here’s something that I want you to bear in mind, and this is a question I get often from financial professionals.  If he waits until next year to take his RMD, does the calculation change?  The answer is no.

You’re still going to use the same fair market value that you would have used today, the same distribution period to calculate his RMD, so the only thing that will change is the fact that he’s going to be taking it next year as opposed to this year.  Remember, if he defers that RMD until next year, he will have two RMDs to take because the 2014 RMD must be taken by December 31, 2014.  The question now becomes, “What happens if John misses the deadline?”  It should be as easy as just playing catch-up and taking the RMD for next year, right?  Well, that is not the case.  If John misses the deadline for taking his RMD, he’s going to owe the IRS an excess accumulation penalty of 50 percent of the amount.

No one wants to be subject to this additional 50 percent excess accumulation penalty, which is why it’s so important to remind clients to take their RMDs by the end of the year.  Now, the IRS is not that harsh.  They do understand that there could be extenuating circumstances that causes an individual to miss this deadline, so they do have an exception where if an individual misses the deadline they can request a waiver “for reasonable cause.”

Even though they haven’t specifically defined that, reasonable cause could include any circumstances beyond the control of the IRA owner.  IRS Form 5329 (available at IRS.gov) must be filed to request a waiver.  A special procedure applies for clients requesting the waiver, including they must withdraw the RMD because they need to prove to the IRS that they have taken the steps necessary to correct an RMD shortfall.  Of course, if they’re requesting the waiver, the 50 percent excess accumulation penalty shouldn’t be paid up front unless the IRS responds to say they are denying the waiver.

Double Check Required Minimum Distributions 

When I tell my clients that they should double check RMDs, the response I usually get is, “Why?”  If the assets are in a qualified plan, such as a 401(k) plan, the pension administrator will do the calculation, right?  That’s not always the case.  Because many of us deal with small business owners and they don’t work with an administrator, they usually look to tax and financial professionals to help them with these calculations.  With an IRA, the IRA custodian is required, by law, to either provide the RMD calculation for the IRA or provide an offer to calculate the RMD upon request.  Bear in mind, though, that this does not apply to Inherited IRAs.

The question then becomes, “If the custodian is already doing the calculation for the IRA, why should it matter to you if the calculation should be done or not?”  The custodian is allowed to make certain assumptions that could result in the RMD being incorrect.  Surprising, right?  That’s the law. They can make certain assumptions about the life expectancy.  However, if the spouse is more than ten years younger than the retirement account owner, the retirement account owner can be allowed to use the Joint Life Expectancy Table which produces a lower RMD amount.

The IRA custodian can choose to use the Uniform Lifetime Table which could cause the retirement account owner to take more than is needed.

Required Minimum Distributions and Multiple Retirement Accounts

Let’s say I like the investments in an account, or I have a special estate planning strategy for an account, and I don’t want to take an RMD from that account; I prefer to take it from another.  The question becomes, “When can that be done?”  If an individual is supposed to take RMDs, can that individual take the RMD for one account from another account?  The answer is, “It depends.”  It depends on the type of account.

Let’s take a look at traditional IRAs first.  The rule is when you’re calculating the RMDs for traditional IRAs, the calculation must be done separately.  You should not combine the balances and do the calculation, because in some cases it could be wrong.

For instance, if the client is eligible to use the Joint Life Expectancy Table in one circumstance, and must use Uniform Table in another, the life expectancy is going to be different, right?  You want to make sure you do the calculations separately, but after the calculation has been done, the amounts can be totaled and taken from one or more of those traditional IRAs.  And for this purpose, “traditional IRAs” also include SEP IRAs and Simple IRAs.  403(b) plans are similar.  If an individual has multiple 403(b) accounts, the calculations must be done separately, but they can be totaled and taken from one or more of the 403(b) accounts.  Qualified plans are very different.

If you have a client who has worked for two different employers and has assets in a 401(k) number 1 from employer number 1, and 401(k) number 2 from employer number 2, the rules say those RMDs must be calculated separately and must be taken from their respective plans.  You cannot combine RMDs for qualified plans.  You also cannot go across plan types.  You can’t take the RMD that’s due from a 403(b) out of a traditional IRA; or you can’t take an RMD that’s due from a 403(b) out of a 401(k).

It’s very important to be aware of what I like to refer to as the “RMD aggregation rule,” because if you think RMDs can be aggregated when they cannot, you might think that you’re taking a RMD for one type of account, when you actually didn’t, because you chose to aggregate the RMD rules when they could not be applied.  We want to pay special attention here for clients who have multiple retirement accounts and want to take the RMDs from one account instead of from each individual account.

File Paperwork on Time

You also want to make sure that the client completes any required paperwork and submits it by the FIRM’S deadline, NOT the IRS’s deadline.  It is the IRA custodian’s duty to calculate the RMD for IRAs as long as they have held the IRA as of December 31 of the previous year, or they should at least provide an offer to calculate the RMD upon request.  This must be provided by January 31 of the year in a RMD notification.  Remember, this RMD notification does not apply to Inherited IRAs, and it doesn’t apply to non-IRAs as well.  If you have a small business owner client with a 401(k) plan, it’s an added service if the financial institution does provide this notification. Double-check to see whether or not your client has, in fact, received the notification.  If not, remind them that they must take their RMDs that’s due for the year.

In many cases, beneficiaries must provide a written election of their distribution option by December 31 of the year following the year of death.  Here’s why this is important, especially in cases where the retirement account owner dies before they’re supposed to start taking RMDs: in some cases the beneficiaries may be subject to the five year rule or the life expectancy rule.

The IRA agreement may have a default provision.  An agreement could state that if you don’t make an election, you’re going to be subject to the five year rule.  If your client wants to stretch distributions over their life expectancy to continue the tax advantage benefit of the IRA for as long as possible, then that would not be good for that client.  You want to make sure for your clients who inherit retirement accounts, that you check the account agreement to see whether or not they need to provide an election for their option.  Because these are distributions, IRA custodians must provide a written notification election and perform any tax withholding.

Clients, too, must make their tax withholding election.  One of the biggest mistakes I see with distribution forms is that a client will fill out these forms and take all the steps that they need to take, but they do not make a withholding election.  That’s fine if they want to have 10 percent withheld, but what if they don’t?  The rule says if you do not make a withholding election, then the custodian must withhold 10 percent for federal income tax.  Some do withhold state income tax as well.  Someone who requests a distribution of $100,000 and didn’t make a withholding election may get a check for only $90,000 just because they didn’t check that box to indicate “do not withhold.”  Make sure that clients do indicate their tax withholding election on all distribution request forms.  Custodians will report these distributions on IRS Form 1099-R, which is a distribution statement that’s provided both to the IRS and the IRA owner.

Roth conversion is another transaction that must be done by year end.  If clients want to take advantage of Roth conversions they must make sure the assets leave the Roth account by December 31.  If the client is subject to an RMD for the year, the RMD must be taken before the conversion is done.  Remind clients that withholding or any amount that is withheld for income tax is not part of the conversion.

We have to pay attention to the firm’s deadline as well.  Many financial institutions get an influx of requests at the end of the year, as everyone is trying to meet their deadlines, so many have experienced situations where they are unable to process these requests.  To prevent that from happening, some financial institutions institute deadlines that are earlier than December 31.

For instance, some will say you have to get the paperwork to us by December 1, and if you don’t, we’ll process your request on a “best efforts” basis; but we can’t make any guarantees.  You want to remind your clients to submit paperwork for anything that needs to get done by the end of the year by the firm’s deadline, even if it’s a month earlier.  In some cases, they can set up distribution requests in advance so that it is processed on an automatic basis so they never miss the end of year deadline.

Top Retirement Tips

Let’s review take-away tips for advisors.

  1. Contact clients early.  I’ve seen financial advisors contact clients as early as January to get distributions done.  Well, how is this possible?  Distributions can be set up on an automatic basis.  Some firms allow you to put in that request and they’ll set it up under a system that it goes out automatically at the end of the year.  Working with a client in January doesn’t mean that the distribution has to be done in January.  Verify calculations for clients, double check life expectancy RMDs for clients, and double check the fair market value.
  2. Remind clients to do those distributions before any other distribution.  Remind them that if they do tax withholding from a Roth conversion, that “withheld amount” is not part of the conversion and is not available for re-characterization.
  3. Firm deadlines are very important. I cannot emphasize enough how important it is to schedule distributions ahead of deadlines and sending paperwork ahead of those deadlines because once you’ve missed a RMD deadline there’s a 50 percent penalty, and I’m sure that we don’t want to have that apply to our clients.

Tips for Clients

  1. Remind them that RMDs are not optional and penalties may apply if they miss those deadlines.
  2. Deferring RMDs past age 70 1/2 can only be done for non-IRA accounts and only if still employed by a plan where the sponsor allows such deferrals.
  3. RMDs not taken by the retirement account’s owner for the year of death must be taken by beneficiaries. This is very important. It is not widely known and your clients will appreciate it.
  4. Paperwork must be submitted ahead of the year-end IRS deadline to allow time for processing
  5. They should notify you of any outstanding transactions (rollovers/ withdrawals/ contributions) still in process.


Denise Appleby, APA, CISP, CRPS, CRC, CRSP – IRA Strategies for Mistakes Prevention Expert

Denise Appleby, APA, CISP, CRPS, CRC, CRSP – IRA Strategies for Mistakes Prevention Expert

About the author:
Denise Appleby, CISP, CRC®, CRPS, CRSP, APA, President of Appleby Retirement Consulting, Inc., provides technical consulting, coaching and marketing-content to financial, tax and legal professionals. She has more than 15 years’ experience in the IRA and defined contribution plans fields. She has held several senior retirement plans related positions with Pershing LLC and has written over 400 articles for many newsletters, newspapers and website.

Denise has co-authored the following three books on retirement accounts:

– Roth IRA Answer Book
– Quick Reference to IRAs
– Adviser’s Guide to Retirement Plans for Small Businesses

She has also provided technical editing to several other retirement plan-related books.

Her expertise and knack of explaining complex retirement plans rules and regulations so that they are easily understood, led her to create several professional and client Quick Reference and other aides which we’ll share more about with you at the end of this session.

Retirement Speakers Bureau

Retirement Speakers Bureau

Denise is a Rutgers State University graduate, holds the following professional certifications:

  • Certified IRA Services Professional (CISP), Institute Of Certified Bankers, Washington DC
  • Certified Retirement Counselor® (CRC®), International Foundation for Retirement Education (InFRE)
  • Accredited Pension Administrator (APA), National Institute of Pension Administrators, Chicago IL, among others