How to take Required Minimum Distributions from multiple accounts

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 Q. My 401(k) has $100,000 in pre-tax contributions and $25,000 in after-tax contributions. Both were rolled over to separate IRA accounts, which have grown to $125,000 and $35,000. When it comes time at age 70 1/2, how is the RMD calculated, given that $25,000 of the $160,000 has already been taxed?

A. The taxation of Required Minimum Distributions (RMDs) can be very complicated business.

The amount of after-tax money in an IRA has no impact on the calculation of the RMD in an IRA, said Howard Hook, a certified financial planner and certified public accountant with EKS Assoc. in Princeton. It does however, have an impact on the calculation of how much of the RMD is taxable in a given year.

“To calculate the RMD, you would aggregate both account balances as of Dec. 31 of the year prior to the current year,” hook said. “You then go to the IRS table to determine what percentage should be withdrawn to meet the required minimum.”

He said if you are single or married and your spouse is not more than ten years younger than you, you’d use the Uniform Lifetime table. If your spouse is more than ten years younger than you, you’d use the Joint Life Expectancy tables.

These tables provide a life expectancy number by which you divide into your ending account balance to figure the RMD, Hook said.

Calculating the amount that is taxable is a bit more complicated. The key is to keep track of the after-tax contributions because they constitute your “basis” in the IRA and are not taxable, Hook said.

“In Year 1, your after-tax contributions as a percentage of the account balance as of the prior year end, multiplied by the amount of your RMD, represents the amount of the distribution that is not taxable,” he said. “The difference between the total amount of the RMD and the non-taxable amount is taxable.”

Then in Year 2, before calculating the percentage, you must reduce your basis in the IRA by the amount of non-taxable distributions in the prior year. A running total should be kept — the IRS provides Form 8606 for taxpayers to do this — until the basis of the IRA is zero, Hook said. After that, all distributions are taxable.

He offered this example using your numbers:

Account Balance #1: $125,000
Account Balance #2: $ 35,000
Total at 12/31/13:      $160,000

IRS Table factor (Age 71): 26.5
2014 RMD: $6,037

After-tax contributions in Account #2: $25,000
% of after-tax to total balances: 15.6% (25,000 / 160,000)
Non-taxable portion of distribution: $943 (15.6% of $6,037)

“In Year 2, you must first reduce the $25,000 of after-tax contributions by $943 so that the basis in the IRA in Year 2 is $24,057,” Hook said.

Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown, came up with the same calculation.

Kiely noted that on Sept. 19, 2014, the IRS issued Notice 2014-54, which spells out the proper treatment for 401(k) rollovers that have both pre-tax and after-tax contributions.

“The IRS will allow the after-tax contributions to be rolled into a Roth IRA, while the pre-tax plus all earnings can be rolled into a traditional IRA,” he said. “Distributions from the regular IRA will be fully taxable and the Roth distributions will be withdrawn tax-free. This notice goes into effect for rollovers made on or after Jan. 1, 2015.”

The new guidance doesn’t apply to your situation, though. But we hope it clarifies things for other investors.

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This story was first posted in December 2014. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.