Multiple Retirement Accounts and RMDs Explained Simply

Having multiple retirement accounts can be a great way to save for your future, but it can also get complicated, especially when it comes to Required Minimum Distributions, or RMDs.

There are several types of retirement accounts, including traditional IRAs, 401(k)s, and Roth IRAs, each with its own rules and regulations.

You can have multiple retirement accounts, but you'll need to take RMDs from each one once you turn 72, unless you're still working for the company sponsoring your 401(k).

This means you'll need to take RMDs from multiple accounts, which can add up quickly and impact your taxes.

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You can have multiple retirement account types, such as IRAs, 401(k)s, and 403(b)s, and still meet the required minimum distribution (RMD) rules. This is where things can get a bit tricky, but don't worry, we'll break it down for you.

You can aggregate RMDs from the same type of account, such as IRAs, but not from different types of accounts. For example, you can't take an RMD from a 401(k) to satisfy an IRA RMD. You must take each RMD from its respective account.

Here's a quick rundown of what you can and can't do:

If you have a company retirement plan, also known as a 401(k), you'll need to take a Required Minimum Distribution (RMD) from it, just like with an IRA.

However, the RMD from a 401(k) can't be used to satisfy the RMD from an IRA, even if you have multiple 401(k)s. This is because 401(k)s are considered separate company plans.

You can't aggregate RMDs from multiple 401(k)s, unlike with IRAs and 403(b) plans, which can be combined for RMD purposes.

The RMD from each 401(k) must be taken separately, even if you have multiple 401(k)s from different employers.

You can inherit IRAs from loved ones, but there are rules to consider. If you inherit multiple IRAs from the same person, you can combine the Required Minimum Distributions (RMDs) and withdraw from just one of those accounts.

Inherited IRAs from different people can't be combined for RMD purposes. This means you'll need to calculate and withdraw from each account separately. For example, if you inherited an IRA from your Auntie Fatima with a $6,000 RMD and your own IRA with a $10,000 RMD, you can't combine them and withdraw from just one account.

Roth IRAs have different rules for inherited accounts. If you inherit a Roth IRA from someone who isn't your spouse, you'll need to withdraw the funds within 10 years of their death. You won't need to take specific RMDs, but make sure the account is emptied within that timeframe.

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Roth conversions can be complicated and costly, especially if not done correctly.

You'll want to avoid converting a traditional IRA to a Roth IRA if you're under 59 1/2 years old, as this can trigger a 10% penalty on the conversion amount.

Roth conversions can also be a bad idea if you're in a high tax bracket, as you'll be paying taxes on the converted amount.

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The tax implications of Roth conversions can be significant, especially if you're converting a large amount of money.

If you're converting a traditional IRA to a Roth IRA, you'll need to pay taxes on the converted amount, which can be a significant expense.

You can avoid Roth conversions by considering alternative strategies, such as taking a lump sum distribution from a retirement account or using a qualified charitable distribution.

Intriguing read: Converting 401k to Roth Ira after Retirement

You have multiple retirement accounts, which can be a blessing and a curse. You're allowed to combine the RMDs from the same type of account, such as IRAs or 403(b)s, and take a single distribution from one of the accounts.

For example, if you have two IRAs, you can combine their RMDs and take a distribution from one of them. But you can't mix and match RMDs from different types of accounts, like taking an IRA RMD from a 403(b) or vice versa.

Combining RMDs within the same type of account can be a convenient option, but it's essential to understand the rules to avoid any potential issues.

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You can't take an RMD from just one account, you need to take it from each account separately. For example, if you have two 401(k)s and a 403(b), you must take three separate distributions, one from each account.

The IRS allows you to aggregate RMDs for certain types of accounts, such as IRAs, 403(b)s, and inherited IRAs. This means you can calculate the RMD for each account and then combine them and take them from any one or combination of accounts.

Here's a breakdown of how you can aggregate RMDs for different types of accounts:

RMDs can be complex, but understanding how they work can help you navigate the process with confidence. If you have multiple 401(k) plans, you'll need to take RMDs from each one, not just one of them.

You can't take an RMD from one type of account and apply it to another. For example, you can't take an RMD from a 401(k) and apply it to an IRA. Each type of account has its own RMD rules.

Here's a breakdown of what you can and can't do with RMDs:

One exception to this rule is 403(b) plans, where you can calculate each RMD and then combine them and take them from any 403(b) account you have. This can simplify the process for people with multiple 403(b) plans.

You can delay your first RMD to as late as April 1 of the following year, but this might not be in your best financial interest. Holding off on that first payment means you have to take two RMDs in less than 12 months, which could bump you into a higher tax bracket.

Two sizable taxable withdrawals in the same year could happen if your accounts are fairly large, and this might subject you to the Medicare surcharge, depending on your modified adjusted gross income (MAGI). The IRS allows this extension, but it's not necessarily a good idea.

Spreading the withdrawals over both years by taking your first payment by Dec. 31 of the year you turn 73 (or 75, depending on your birth year) is recommended by some financial experts.

Government pensions are often tax-free, but may be subject to RMD rules.

If you're receiving a government pension, such as a military pension or a pension from a state or local government, you may be exempt from paying taxes on it. However, this exemption only applies if you're under 70 1/2 and haven't started taking distributions from other retirement accounts.

Government pensions can be a significant source of income in retirement, and you should consider how they'll impact your overall tax situation.

Some government pensions are subject to RMD rules, which means you'll need to take annual distributions starting at age 72. This includes pensions from the U.S. government, as well as pensions from some state and local governments.

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You'll need to take required minimum distributions (RMDs) from your retirement accounts by December 31st of each year, starting at age 73.

For people born in 1960 or after, you don't have to take RMDs until the year you reach age 75.

If you withdraw less than the RMD amount by the deadline, you'll owe the IRS an excise tax of 25% of the shortfall, which can be reduced to 10% if you correct the error within two years.

Common RMD errors include paying distributions for both spouses from one spouse's account or paying an RMD for one account with funds from a different type of qualified account.

Delaying RMDs and incorrectly assessing an account's value are other common mistakes.

Here's a quick rundown of the RMD age changes:

Make sure to speak with a financial advisor or tax accountant if you need help figuring out your RMDs or taking them on time to avoid any mistakes.

Accurate account management is crucial when dealing with multiple retirement accounts and Required Minimum Distributions (RMDs). The custodian of your retirement accounts usually provides a report of your fair market value (FMV) by Jan. 31 of the following year.

However, if there is limited information on the year-end value, the calculation can be challenging. This can happen if you've lost statements, moved accounts, or have hard-to-value assets within the portfolio.

To avoid potential errors, let your custodian know about any transactions within the year that could conceivably affect your RMD. This will help ensure you receive an accurate FMV report and can make informed decisions about your retirement accounts.

Using Incorrect Fair Market Value can be a challenge when calculating your Required Minimum Distributions (RMD). The RMD for a year is determined by dividing the previous year-end's fair market value (FMV) for your retirement account by the applicable distribution period.

This period is based on your age, and you can find it on the IRS-issued life expectancy tables. The custodian of your retirement accounts usually provides a report of your FMV by Jan. 31 of the following year.

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Limited information on the year-end value, such as lost statements or hard-to-value assets within the portfolio, can make this calculation difficult. This is according to Jillian C. Nel, CFP, CDFA, director of financial planning at Inscription Capital LLC in Houston, Texas.

Your RMD might also change if you make relevant changes after your FMV was calculated, based on year-end information. Changes introduced in the Tax Cuts and Jobs Act of 2017 have made such late changes less common.

Here are some factors that could conceivably affect the RMD you're required to make by Dec. 31:

Managing multiple retirement accounts can be a challenge, and it's easy to make mistakes. You can't take the required minimum distribution (RMD) from one type of account and apply it to another.

For instance, you can't take an RMD from a 401(k) and apply it to an IRA, or vice versa. Each type of account requires its own separate distribution. If you have two 401(k)s and a 403(b), you'll need to take three separate distributions – one from each 401(k) and one from the 403(b).

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However, there is an exception for 403(b) plans. If you have more than one 403(b), you can calculate each RMD and then combine them and take them from any 403(b) account you have.

Here's a breakdown of the different types of accounts and how they can be aggregated:

It's also worth noting that if you make changes to your account after the fair market value was calculated, your RMD might change. This is why it's essential to let your custodian know of any transactions within the year that could conceivably affect the RMD you're required to make by Dec. 31.