Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceEasy
A client is 68 years old and retired. They have a Traditional IRA and must begin taking distributions. Which of the following statements regarding their Required Minimum Distributions (RMDs) is TRUE?
- AFailure to take an RMD results in a 10% penalty on the amount not distributed.
- BThe RMD amount is calculated annually based on life expectancy tables.
- CRMDs can be delayed indefinitely if the client is still employed.
- DRMDs are tax-free if rolled over to a Roth IRA.
Show answer & explanationAnswer & explanation
Correct answer: B. The RMD amount is calculated annually based on life expectancy tables.
RMDs are calculated annually by dividing the account balance as of December 31 of the prior year by a life expectancy factor provided by the IRS, ensuring the funds are distributed over the individual's lifetime.
Why the other options are wrong
- A. Failure to take an RMD results in a 25% penalty (formerly 50%) on the amount not distributed, not 10%.
- C. RMDs from an IRA can generally only be delayed if the individual is still employed AND owns less than 5% of the company sponsoring the plan, which is not applicable to a personal IRA.
- D. RMDs cannot be rolled over to a Roth IRA tax-free; they must be taken first, then a separate Roth conversion can occur, which is taxable.
Required Minimum Distributions (RMDs)
Mandatory annual withdrawals from traditional IRAs and other qualified retirement plans once an individual reaches a certain age (currently 73), calculated based on life expectancy.
- Mandatory withdrawals from traditional IRAs.
- Start at age 73 (previously 72, 70.5).
- Calculated using IRS life expectancy tables.
- Subject to a 25% penalty if not taken.
Memory trick: RMDs: Required Money Delivered by Schedule.