The RMD When Transferring Accounts to a New Trustee

by D. Laverne O'Neal

Owners of traditional IRAs, as well as 401(k), 403(b) and 527 plans, must begin taking distributions at age 70 1/2. Calculating the required minimum distribution (RMD) requires an age-related divisor from an IRS life-expectancy table. For a number of reasons, a retirement plan owner might decide to transfer her account from one trustee to another. In the event of an account holder's death, the beneficiary may elect to transfer the balance to a new trustee.

RMD Explained

Contributions to traditional IRAs and 401(k), 403(b) and 527 plans are not taxed. The IRS taxes distributions instead. You calculate the RMD by dividing the account balance as of Dec. 31 of the previous year by a figure from an IRS life-expectancy table that corresponds to your age. If your spouse is younger than you by 10 years or less, use the Uniform Lifetime Table. You must also use this table if you are single or if your spouse is not your sole IRA beneficiary. If your spouse is more than 10 years your junior and is your sole beneficiary, employ the Joint and Last Survivor Table. IRA beneficiaries base the RMD calculation on the Single Life Expectancy Table. Though the trustee typically calculates the RMD amount, by law it is the account holder's responsibility to perform the calculation. The trustee informs the IRS of the yearly distribution amount. If the trustee fails to make the RMD on time, the IRS taxes the undistributed amount at a rate of 50 percent.

Traditional IRA Trustee-to-Trustee Transfer

If you make a direct -- or trustee-to-trustee -- transfer of a retirement account balance to a traditional IRA you are not required to take the minimum distribution for that year before making the transfer. For example, your account balance is $100,000 and your RMD is $1,340 for that year. In April, you transfer the balance directly to a traditional IRA. You are not required to take the minimum distribution prior to the transfer. However, before the end of that calendar year, you must take the RMD from the new IRA account.

Roth IRA Trustee-to-Trustee Transfer

On the other hand, if you transfer the balance to a Roth IRA, you must take the RMD in advance. (Unless you made nondeductible contributions to your traditional IRA, the entire amount of the Roth transfer is taxable at your ordinary income tax rate.) Continuing with the above example, you would have to withdraw the RMD of $1,340 from the $100,000, leaving just $98,660 to transfer.

Spouse Beneficiary

If your spouse dies and leaves you the balance in his traditional IRA or 403(b), 401(k) or 457 plan, you may make a trustee-to-trustee transfer of the inherited assets to your own IRA. You may then take RMDs according to your own life expectancy.

Non-Spouse Beneficiary

If you inherit a traditional IRA or 403(b), 401(k) or 457 plan from anyone other than your spouse, you may set up an "inherited IRA," then transfer the inherited assets directly to that account. You must start your RMDs by the last day of the year following the account owner's death. If the deceased had not yet started taking distributions and you start taking them the year he died, you will calculate your first RMD using the life-expectancy table data that corresponds to the age of the deceased. Thereafter, you calculate the RMD by dividing the account balance as of Dec. 31 of the previous year by the IRS Single Life Expectancy Table figure that corresponds to your own age. As a non-spouse beneficiary, you may not roll the inherited assets into your own existing IRA. The inherited IRA funds must be kept in a separate "inherited IRA" account that includes the name of the deceased. An example, according to retirement finance expert Ed Slott in an article from the MACPA website, would be "Tom Smith as beneficiary of John Smith."

About the Author

D. Laverne O'Neal, an Ivy League graduate, published her first article in 1997. A former theater, dance and music critic for such publications as the "Oakland Tribune" and Gannett Newspapers, she started her Web-writing career during the dot-com heyday. O'Neal also translates and edits French and Spanish. Her strongest interests are the performing arts, design, food, health, personal finance and personal growth.

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