Engineer retires at age 67 with retirement savings in various IRAs; begins taking minimum required distributions (MRDs) from all these IRAs at age 70 1/2 per the rules.
He also begins doing some occasional consulting at age 71 (mostly as consultant or expert witness in patent litigation); reports this income as self employment income on tax returns (doesn't incorporate or set up any kind of LLC or other legal structure. He also sets up and begins making allowed contributions into a Keogh Plan set up with the same financial organization that provides all his IRAs, and takes an appropriate deduction for these contributions on his annual tax returns.
Several years later he's still doing all this. Is he also supposed to be taking MRDs from what's accumulated in his Keogh account over this period of time?
Yes, of course. A self-employed person is defined as an employee for purposes of Sec. 401 in Sec. 401(c). The plan will be subject to the excise tax provided by IRC Sec. 4974 if the RMDs are not made. There are provisions for abatement of the penalty (50% of the difference between the RMD and the amount actually distributed during the year) but you have to pay the penalty first and then apply for abatement on Form 5329. See the Form 5329 instructions.
If he's over 70.5 he must include the value of ALL his retirement accounts requiring RMDs in the calculation of his RMD AND he must take the RMD amount annually. BUT he doesn't necessarily have to actually take money from the Keogh plan itself. Once he knows how much he must take, he can use the "Musketeer Method" for distributions - some from all or all from one!
For purposes of required minimum distributions, you must calculate a separate distribution from each type of plan. A taxpayer who has multiple accounts for each type of plan uses the aggregate balance of each type to calculate the RMD. That RMD can be taken from any number of that account type. This info is buried in the final regs for Sec. 401.
Example 1: Taxpayer worked for two employers and has two 401(k) plans with spouse as beneficiary. T/p calculates RMD on total balance in both plans. T/P must take the RMD from one or both 401K plans.
Example 2: Same as Example 1 and T/P also has a 403(b) plan with spouse as beneficiary. T/P performs the same calculation as in Example 1 to obtain the 401(k) RMD and must take the RMD from one or both 401(k) plans. T/P performs a separate calculation for the 403(b) and must take the RMD from the 403(b).
Example 3: Same as Example 2 and T/P has 3 traditional IRA accounts in his name with his spouse as sole beneficiary. T/P performs the same calculation as in Example 2 and must take a 401(k) distribution and a
403(b) distribution. T/P calculates the IRA RMD by using the account balances of all 3 accounts. RMD can be taken from 1, 2 or 3 different IRA accounts.
Example 4: T/P has a traditional IRA in his name with his son as sole beneficiary. T/P also has a traditional IRA with his spouse who is 15 years younger as the sole beneficiary. T/P also has a traditional IRA inherited from his uncle. T/P computes three separate RMDs for the three different IRA accounts as the life expectancy factor is different for all 3 accounts. T/P can withdraw the total RMD from 1, 2 or 3 IRA accounts.
I just reread my examples and realized that the examples that contain two 401(k) plans is in error. When you have a 401(K) from multiple employers, you must calculate your RMD for each employer's plan and you must take that RMD from each employer's plan. This rule also applies to
I just realized that Example 4 is incorrect. You can only aggregate IRAs in which you are an owner. You can not aggregate an IRA in which your interest is as a beneficiary. In my example, the RMD for the beneficiary IRA must be withdrawn from the beneficiary IRA. The amounts calculated for the other two IRAs can be aggregated. Lastly, you can aggregate beneficiary IRAs that were inherited from the same decedent. The above info is found in Notice 88-38.
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.