How to Handle Required Minimum Distributions (RMDs) for Multiple Retirement Accounts
Written by Carson Hamill CIM®, CRPC®, Associate Portfolio Manager & Assistant Branch Manager & Dean Moro BComm, CIM®, Associate Portfolio Manager
When it comes to retirement savings, it's not uncommon for individuals to hold multiple accounts, such as IRAs, 401(k)s, and various pension plans. As you reach the age of 73 (or 70½ if you were born before July 1, 1949), the IRS requires you to start taking Required Minimum Distributions (RMDs) from these accounts. But how does this work when you have more than one account? Let's break it down.
- RMDs for Multiple IRAs: One or All?
- RMDs for Multiple 401(k)s: Separate Distributions Required
- RMDs for Multiple Pension Accounts: The Need for Separate Withdrawals
- Consolidation
- Penalty
- RMDs for Multiple IRAs: One or All?
If you have multiple Individual Retirement Accounts (IRAs), you're in a unique position regarding RMDs. Each IRA has its own RMD that must be calculated separately. However, unlike other retirement accounts, the IRS offers some flexibility here. You do not need to take a separate RMD from each IRA. Instead, you can take the total RMD amount from just one IRA or distribute it across multiple IRAs. The key is to ensure that the total RMD for all your IRAs is met.
For example, if you have three IRAs with total RMDs of $4,000, $3,000, and $2,000, you could choose to take the entire $9,000 from just one account or split it between the three. As long as the total RMD is satisfied, you’re good to go.
- RMDs for Multiple 401(k)s: Separate Distributions Required
When it comes to 401(k) accounts, the rules are more stringent. Unlike IRAs, if you have multiple 401(k)s, you must take an RMD from each account individually. You cannot combine the RMDs and take the total from just one account. Each 401(k) has its own RMD that must be withdrawn from that specific account.
For instance, if you have two 401(k)s, one with a $5,000 RMD and another with a $3,000 RMD, you must take the $5,000 from the first 401(k) and the $3,000 from the second. The IRS does not allow any mixing and matching here—each 401(k) stands on its own when it comes to RMDs.
- RMDs for Multiple Pension Accounts: The Need for Separate Withdrawals
If you hold multiple pension accounts, such as a TIAA, 403(b), 457 plan, and an IRA, the rules can get a bit more complex. Similar to 401(k)s, you must take the RMD from each pension account separately. Each type of account—whether it’s a 403(b), 457, or TIAA—requires its own RMD calculation, and the distribution must be taken directly from that account.
For example, if you have a 403(b) with a $4,000 RMD, a 457 plan with a $3,500 RMD, and an IRA with a $6,000 RMD, you must withdraw the $4,000 from the 403(b), the $3,500 from the 457 plan, and the $6,000 from the IRA. There’s no option to consolidate these RMDs into one withdrawal. Each account’s RMD must be satisfied individually.
Final Thoughts
Navigating RMDs from multiple IRAs and other retirement accounts can feel a bit like the world of Seinfeld: confusing, full of odd rules, and sometimes tempting to just "yada, yada, yada" your way through it. However, it's crucial to understand how to manage RMDs across multiple accounts to stay compliant with IRS regulations and avoid penalties.
While IRAs offer some flexibility, 401(k)s, and other pension accounts require separate RMDs from each account. To simplify this process and reduce stress, consolidating your accounts into one IRA can be a practical solution. This strategy not only streamlines your RMDs but also helps you avoid the hefty penalties associated with missed distributions.
If you fail to take your RMD, the IRS can impose a penalty of 25% on the amount you should have withdrawn. For example, if your RMD was $4,000 and you didn’t take it, you’d owe the IRS $1,000 as a penalty. However, if you correct the mistake promptly, the penalty can be reduced to 10%, meaning you'd owe only $400. Additionally, you'd still need to pay taxes on the $4,000 as if you had withdrawn it. To avoid these penalties, it's crucial to take your RMD by the deadline each year.
About Snowbirds Wealth Management
Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro and Carson Hamill, associate portfolio managers with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders.
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