Tax Attic: Facts about required minimum distributions


Congress gave small employers and their employees one New Year’s gift right at the end of their 2016 legislative session when they passed the 21st Century Cures Act of 2016. The background of the Cures Act is in a pretty onerous provision of the Affordable Care Act that finally took affect on June 30, 2015. It proposed to penalize employers $100 per day per employee if the employer was reimbursing employees for health insurance. This provision was in the original Obamacare bill as passed back in 2010 but by Executive Order of President Obama, the IRS was not allowed to implement it. It must have been one of the provisions in the bill that Nancy Pelosi was talking about when she said they had to pass the bill to find out what was in it. When the IRS and Congress realized the extent of the potential penalties, this is one provision no one liked. The Cures Act now allows employers with fewer than 50 employees, and not offering health insurance, to set up a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). Under a QSEHRA, the employer is allowed to reimburse, on a tax free basis, health insurance costs for each employee up to $4,950 for single coverage and $10,000 for family coverage. A new W-2 code will be developed because the QSEHRA amount must be reported on the employees W-2 even though it is not taxable. The employee must certify to the employer that he/she is purchasing health insurance in order for the QSEHRA amount to be not taxable. If the employee ends up not having health insurance, the QSEHRA reimbursement will be included in the W-2 of the employee as taxable wages and there will be a penalty to be paid. Coincidentally, it appears that the penalty will be the $100 per day. In the end, this is an opportunity for employers to provide some money on a pre-tax basis to employees to help them cover health insurance costs.

This week, let’s talk about Required Minimum Distributions (RMDS). Once a taxpayer reaches the age of 70 ½, that taxpayer is required to take an RMD from all taxable retirement accounts. The distribution is based on the total fair market value of all taxable retirement accounts.  I stress “taxable” because Roth IRAs owned by the taxpayer, in most instances, are not considered taxable. If the Roth is not taxable, it is not subject to the RMD rules and the fair market value of the Roth is not included in the RMD calculation. Fair market values of 401k, 403b, Simple IRA, SEP IRA, 457, and all traditional IRA accounts are subject to the RMD rules. The RMD amounts are calculated per account. If the taxpayer has two 401k accounts, the RMD must be calculated separately for each 401k and taken separately from each account. However, if the taxpayer has two IRA accounts, even though the RMD is calculated on a per account basis, the distribution can be taken from either of the two accounts. The RMD amounts, for the most part, are calculated using the Uniform Lifetime Table. A taxpayer age 70 is expected to live another 27.4 years. Converting the 27.4 years to an RMD percentage means that the taxpayer is expected to withdraw an RMD amount of 3.65%. A taxpayer age 80 is expected to live another 18.7 years and must withdraw 5.35% as his RMD amount. A person age 90 could live another 11.4 years and has to withdraw 8.77%. Finally, the 100 year old by the table has a life expectancy of 6.3 years. That equals an RMD of 15.87%. The longer a taxpayer lives, the higher will be the RMD percentage.

The taxpayer will never get in trouble for withdrawing more than the RMD. Of course, the taxpayer has to pay tax on the additional amount and the results may be expensive. In our tax system, for the most part, the more income you have, the more tax you have to pay. The taxpayer might get in severe trouble, however, for not withdrawing at least the RMD amount. The RMD rules are in place to ensure that taxpayers withdraw their retirement funds during their lives and pay tax on those distributions as opposed to passing those funds on to their beneficiaries. The potential penalty is 50% of the RMD amount not withdrawn. The IRS may waive the penalty if there is a reasonable cause for not taking the RMD. It’s best to withdraw the proper RMD amount and not hope the IRS will waive the penalty. The RMD starts at age 70 ½. At that age, taxpayers must take distributions. However, taxpayers too young generally can’t take distributions from retirement accounts without being penalized either. “Too young” is 59 ½ years old. The penalty for an early withdrawal is 10%. In this case, there are several reasons to be able to withdraw funds before the age of 59 1/2 and not be penalized. Next week, I will go over some of those reasons. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.

He owns Action Tax Service on Northland Dr in Rockford.

Contact Jerry at