One-time change to RMD method – additional question
L1: One-time change to RMD method – additional questionIf a taxpayer has a SEPP established using either the amortization or annuitization method, they can make a one-time change to use the RMD method. While I know you recommend making such a change only at the beginning of a calendar year, I havea question about what happens if such a change is made at some other time of the year.
What would the required annual distribution amount be for the year in which such a change is made?
-Would it remain the original amount, as calculated under the old method?
-Would it now be reduced to only the amount yielded by the RMD calculation (sort of ‘retroactive’ to the beginning of the year)?
-Would it be prorated between the two, for example 1/2 of the required annual distribution under the old method and 1/2 of the required amount under the new method if distributions were taken monthly and the change was made in July, after the first 6 monthly distributions?
In case the above isn’t clear, let me add sample numbers to illustrate. Assume the initial calculation yields a required annual withdrawal amountof $24,000/year or $2,000/month, and the RMD calculation in Julyyields an annual withdrawal amount of $12,000/year or $1,000/month, how much must you withdraw in that changeover year in order to be in compliance?
Thanks yet again2012-03-19 07:29, By: WhyMe, IP: [184.108.40.206]
L2: One-time change to RMD method – additional questionWhyme,
From what I have read on this site over 5-7years on this topic, I believe a calculation/change (to RMD-using end yr balance) can be made after withdrawals have already been made (under original method in a new year)ONLY ifthe total $$ taken to date does not exceed the $$ allowed under RMD calc for that newyear. Then,anyremaining withdrawals for the new year, when added to what was already taken, must then total the RMD $$ for that year. I would not recommend a “blended” total as you outlined.I am just speaking from what I have read. Remember that a switch to RMD requires annual recalculation of the new year’s withdrawal amount based on yr end balance and new attained age in next year.KEN2012-03-19 15:29, By: Ken, IP: [220.127.116.11]
L2: One-time change to RMD method – additional questionWhyMe…
Ken pretty much answered your questions. Based on reading all of the questions in both iof your posts, I think you might be making the issue a lot more complicated than it needs to be.
In the year of the change, the total amount distributed should equal the amount calculated using the Minimum Distribution method. If total withdrawals have already exceeded the MD amount, don’t make the change unless eligible to roll the excess back into the account.
The initial balance used in the year of the change can be any balance that represents the actual market value of the IRA assets. If there have already been withdrawals in the year of the change, the balance used should be the balance after the withdrawals.
In subsequent years, use the previous 12/31 balance and attained age as of 12/31 of the current year. The calculation must be made every subsequent year until the SEPP plan ends.2012-03-19 16:36, By: Gfw, IP: [18.104.22.168]
L3: One-time change to RMD method – additional questionMy thanks to both of you for your quick and thoughtful replies. As I said, I’m no expert in any of this.
I think one of my clients may have a situation where his advisor did it wrong, resulting in an under distribution for a previous year. The one remaining question I have is this – can you address that by filing a 5329 and paying the 50% excise tax on the amount not distributed, or must you treat it as a busted plan and go through the 10% tax and penalty process for the entire plan?
Thanks2012-03-19 20:29, By: WhyMe, IP: [22.214.171.124]
L4: One-time change to RMD method – additional questionThe 50% excise tax applies to Required Minimum Distributions at age 70.5 – it does not apply to a SEPP. My guess is that the plan is busted, but without details, I really don’t know. The penalty for a busted SEPP is 10% on all previous withdrawals plus interest that the IRS will calculate. 2012-03-19 20:48, By: Gfw, IP: [126.96.36.199]
L5: One-time change to RMD method – additional questionThanks. I’ll strongly urge these folks to get professional guidance ASAP, and I’ll use the information you and Ken have provided as the reason why they need to do so.2012-03-19 23:35, By: WhyMe, IP: [188.8.131.52]