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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Sayonara925 on December 17, 2016, 02:38:17 PM

So I've been monitoring parents finances over the last few years, both are late 80s. Both have IRAs and have been taking annual RMDs at the minimum level (or so I thought).
Last year I could have sworn the calc was basically to divide the balance in the IRA by 6.x to figure the minimum distribution.
This year it seems that the calc is more like balance/12.x
Is this correct? If so, can someone tell me why the big change. If I'm wrong, can you please point me to the correct calculation information. Thanks in advance.
If the divisor is now 12.x, that's great news. However, we now have a much bigger problem. The bank has been calculating the minimum distribution amount for us. Each year, around Dec 15th, a transfer is automatically made from the IRAs to regular savings. I typically check that the RMD was made around this time each year.
I just checked and noticed the RMD transfer was much higher than last year! Something is not right, the amount should be much lower. But today is Saturday and I won't be able to contact the bank until Monday about what happened. Now I'm worried that once the transfer has been made, if there was an error by the bank, it cannot be corrected. Meaning, I'm concerned we can't just stuff the excess amount back in the IRA account.
Any insight you guys can offer would be appreciated.

Looking at this table: https://www.irs.gov/pub/irstege/uniform_rmd_wksht.pdf For someone that is 89 years old it should be dividing by 12.

I just checked and noticed the RMD transfer was much higher than last year!
Have the investments in the account grown significantly?

Looking at this table: https://www.irs.gov/pub/irstege/uniform_rmd_wksht.pdf For someone that is 89 years old it should be dividing by 12.
That's what I thought (OP when I mentioned divisor of 12.x). Last year it was more like 6.x. One of my questions is, does anyone know when/why this jump occurred? This degree of increase means retirees (70 1/2 and older) can keep much more stash in their retirement accounts and reduce taxes significantly. That's what I'm interested in regarding my parents.
So there was apparently a huge error in the RMD calc by the bank. Now I need to figure out whether this can be fixed AFTER the money was distributed out of the IRA account. And a chunk was also withheld for Federal and State taxes.
Have the investments in the account grown significantly?
No, not significantly. Not nearly enough to account for the large RMD transferred out of the account. It was about a 25% distribution.

As I understand RMDs, the RMD for your Dad should be (Dad's total IRA balance on 12/31/15) / (Dad's divisor from last year plus 1). Similarly for your Mom.
One does not go back to the tables each year. One uses the table the first year of the RMD to obtain the initial divisor, then each subsequent year increase the divisor by 1 and use the balance in the IRAs as of the end of the previous calendar year.
I don't know how to correct such a situation where too large of an RMD was distributed. The bank probably has language that you agreed to when you signed up for them to do the calculations that they would give it their best shot but not be liable for any mistakes.
There is no tax penalty for taking out more of an RMD than the required minimum. If it can't be corrected (and I suspect it cannot, but I don't know for sure and would look into it if I were in your shoes), then your parents will need to pay the associated income taxes and of course the sheltering of whatever extra was taken out will be lost.

As I understand RMDs, the RMD for your Dad should be (Dad's total IRA balance on 12/31/15) / (Dad's divisor from last year plus 1). Similarly for your Mom.
One does not go back to the tables each year. One uses the table the first year of the RMD to obtain the initial divisor, then each subsequent year increase the divisor by 1 and use the balance in the IRAs as of the end of the previous calendar year.
I don't know how to correct such a situation where too large of an RMD was distributed. The bank probably has language that you agreed to when you signed up for them to do the calculations that they would give it their best shot but not be liable for any mistakes.
There is no tax penalty for taking out more of an RMD than the required minimum. If it can't be corrected (and I suspect it cannot, but I don't know for sure and would look into it if I were in your shoes), then your parents will need to pay the associated income taxes and of course the sheltering of whatever extra was taken out will be lost.
Are you sure we're talking about the same thing? I'm no expert, but I thought *inherited* IRAs worked like you describe.... but regular old traditional IRAs went back to the tables.
OP: Is it possible the reason the amount has gone up so much is that everything is being done correctly? Maybe the 6.x is just a misremembering? The way the formula is designed is to progressively drain the account faster and faster. When you start out dividing by 27... it's not such a big number... but as you age, it really starts zooming up.

As I understand RMDs, the RMD for your Dad should be (Dad's total IRA balance on 12/31/15) / (Dad's divisor from last year plus 1). Similarly for your Mom.
One does not go back to the tables each year. One uses the table the first year of the RMD to obtain the initial divisor, then each subsequent year increase the divisor by 1 and use the balance in the IRAs as of the end of the previous calendar year.
I don't know how to correct such a situation where too large of an RMD was distributed. The bank probably has language that you agreed to when you signed up for them to do the calculations that they would give it their best shot but not be liable for any mistakes.
There is no tax penalty for taking out more of an RMD than the required minimum. If it can't be corrected (and I suspect it cannot, but I don't know for sure and would look into it if I were in your shoes), then your parents will need to pay the associated income taxes and of course the sheltering of whatever extra was taken out will be lost.
Thank you for the reply. Now I'm really worried. The large amount of tax this will result in for 2016 taxes is my main concern.

As I understand RMDs, the RMD for your Dad should be (Dad's total IRA balance on 12/31/15) / (Dad's divisor from last year plus 1). Similarly for your Mom.
One does not go back to the tables each year. One uses the table the first year of the RMD to obtain the initial divisor, then each subsequent year increase the divisor by 1 and use the balance in the IRAs as of the end of the previous calendar year.
I don't know how to correct such a situation where too large of an RMD was distributed. The bank probably has language that you agreed to when you signed up for them to do the calculations that they would give it their best shot but not be liable for any mistakes.
There is no tax penalty for taking out more of an RMD than the required minimum. If it can't be corrected (and I suspect it cannot, but I don't know for sure and would look into it if I were in your shoes), then your parents will need to pay the associated income taxes and of course the sheltering of whatever extra was taken out will be lost.
Thank you for the reply. Now I'm really worried. The large amount of tax this will result in for 2016 taxes is my main concern.
Unfortunately... this is kind of how tIRAs work. They shift the tax burden from the working years into the retirement years. In theory, that means you'll be paying in a lower tax bracket. At some point though, the RMDs do accelerate enough that your bracket will start creeping up  especially if you've taken the minimum over the years.

As I understand RMDs, the RMD for your Dad should be (Dad's total IRA balance on 12/31/15) / (Dad's divisor from last year plus 1). Similarly for your Mom.
One does not go back to the tables each year. One uses the table the first year of the RMD to obtain the initial divisor, then each subsequent year increase the divisor by 1 and use the balance in the IRAs as of the end of the previous calendar year.
I don't know how to correct such a situation where too large of an RMD was distributed. The bank probably has language that you agreed to when you signed up for them to do the calculations that they would give it their best shot but not be liable for any mistakes.
There is no tax penalty for taking out more of an RMD than the required minimum. If it can't be corrected (and I suspect it cannot, but I don't know for sure and would look into it if I were in your shoes), then your parents will need to pay the associated income taxes and of course the sheltering of whatever extra was taken out will be lost.
Are you sure we're talking about the same thing? I'm no expert, but I thought *inherited* IRAs worked like you describe.... but regular old traditional IRAs went back to the tables.
OP: Is it possible the reason the amount has gone up so much is that everything is being done correctly? Maybe the 6.x is just a misremembering? The way the formula is designed is to progressively drain the account faster and faster. When you start out dividing by 27... it's not such a big number... but as you age, it really starts zooming up.
I don't think I mentioned it before, but these are both Inherited IRAs (didn't mention because I didn't know it made a difference). Thanks for pointing out the distinction.
So I finally got through to the estate department at the bank. They say there was apparently a calculation error (but not of the magnitude I was thinking at first). They are attempting to correct the error and replace a portion of the overdraw back into the IRA account, and also correct the tax withholding. They will call back to update whether they were successful.
secondcor, the information you gave above is essentially correct based on what the bank agent said. You do not go back to the tables each year. The calc is based on the life expectancy of the inheritor at the year of death (taken from IRS tables from that year) then subtract 1 from that each subsequent year. I was completely unclear on that. If I were doing the calc instead of the bank, I would have used the divisor of 12.x from 2016 tables and gotten into IRS trouble. Even the bank didn't get it right. They divided by 3.x and now they are saying it should have been 4.x. So this should result in some tax savings, but not the amount I was thinking.

Interesting still is the divisor (life expectancy) jump from 6.x to 12.x in years 2015 to 2016.
Did the IRS just suddenly get generous?

This is the real "gotcha" with IRAs... and inherited IRAs. It's pretty common that if you have an inherited IRA, you also have a traditional IRA. These two collide and you get an exponentially growing income over the years. I've computed mine going out to my 70s/80s and I'm trying to plot a course that minimizes (or at least spreads out) the tax liability.
For myself, I'm looking to try to draw as much as I can above the RMD and still meet ACA subsidies. But I'm at the early "small end" of the formula. Unfortunately for your parents, they're at the ballooning end of the formula and it's probably too late to lower their liability. It's just going to go up every year.

Yes, and the RMDs have bumped their Soc Sec income way into the taxable range, whereas before they were paying zero. Nothing much can be done except to ensure the IRA distribution is the smallest allowable.

Just a quick update...
The bank was able to correct its RMD calculation errors and replace a portion of the money that was taken from the IRAs. I'm a bit surprised they were able to do this. They also adjusted the amounts withheld for state and federal taxes.
This will amount to several thousand dollars less tax for 2016. Kickin' the can down the road.