RMDs for IRAS Are Back

When the stock market fell off a cliff in 2008, the IRS took pity on senior citizens whose retirement accounts were left in tatters and suspended the required minimum distribution (RMD) rules for 2009. Now they’re back and ignoring them can cost a taxpayer a bundle. If you’re covered by the RMD regulations, you must withdraw a minimum amount from the accounts or face a stiff penalty of 50% of the difference between what you should have taken out and what you actually withdrew.

The rules apply mostly to retirement account owners who are age 70 1/2 or older, but they can also affect those who inherit retirement accounts. If you are the heir of your spouse’s account, often your best move is to convert the account to your own name. The IRS will then treat you as if you always owned the account and you can put off RMDs until you reach 70 1/2.

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If you inherit from a person who is not your spouse, the rules get trickier. You can’t roll the assets over into your own account and you must start to take minimum distributions, based on your life expectancy, in the year after the account holder dies. There’s also a five-year option, where you liquidate the entire account by the end of the fifth year after the year in which the account owner dies.

Although the owner of a Roth IRA is not subject to RMD rules, his/her heirs are. The regulations for Roths are similar, except that, if the heir is the spouse of the Roth owner, he/she is not required to take money out. Heirs who are not spouses must take RMDs based on their life expectancy. You can go to irs.gov for more information but, as with any tax issue, it’s best to talk to your tax professional for guidance.