There are many ways to make both large and small mistakes when it comes to Required Minimum Distributions (RMDs).
Having multiple accounts can be an essential management tool, especially when it comes to retirement accounts. You likely have an employer-sponsored plan, be it a 401(k) or 403(b) plan. You may also have a 457(b) plan and/or Thrift Savings Plan with your employer. If you also are self-employed, you may have a SEP-IRA or SIMPLE IRA. And then just because you have earned income you can fund a IRA.
Each account type has slightly different IRS rules and contribution limits (see “How Much Can I Contribute to My Retirement Accounts?” for a full description), but having so many accounts can add up to lots of savings, deferrals, and deductions.
Alas, when you turn 70 1/2 and have to take your RMD from all your Traditional retirement accounts, having so many different accounts can be frustrating. When you are retired, you can do roll-outs or rollovers to move all your money into an IRA. However, if you are still working, you probably want to keep the accounts separate so that you can continue your contribution strategy and maybe continue to protect some of your accounts from RMDs.
The question is how many RMDs do you have to take? Or, put another way, how many accounts can you aggregate to take just one withdrawal and satisfy the RMD for all of them?
The IRS has very clearly answered this question in their Frequently Asked Questions on RMDs:
Can an account owner just take a RMD from one account instead of separately from each account?
An IRA owner must calculate the RMD separately for each IRA that he or she owns, but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns, but can take the total amount from one or more of the 403(b) contracts.
However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans have to be taken separately from each of those plan accounts.
This is the rule for RMDs: like with like for IRA and 403(b), separate for the other account types. The reason the IRS has this rule is because there are small legal differences in the tax code for each type of account and sometimes with each different employer. However, Traditional IRAs are all treated the same regardless of if they have different account numbers or custodians. And 403(b) plans have always gotten special treatment because they are exclusively utilized by charities or governmental organizations.
That being said, although you can aggregate IRAs or 403(b)s, I recommend keeping all accounts separate for at least 4 reasons.
1. You might make a mistake.
It is easy to forget which account types get the exception. If you remember wrong and aggregate when you shouldn’t have not only might you take out too much from one account, you might owe the 50% penalty for failing to take your RMD from another account! That is a high penalty for a small convenience.
2. Your beneficiaries might be different.
Although there are cleaner ways of designing your estate plan, I know many families who have created multiple IRAs in order to place different beneficiary designations on them. There are pros and cons to this estate planning technique, but the point is if you have this kind of plan, you might accidentally overspend only one heir’s share.
3. The easy stuff is often the good stuff.
Aggregating accounts for RMDs is normally only tempting when one account’s custodian, securities, or features are too annoying to work with. The annoyance makes you leave that IRA alone and pull its RMD from another IRA. However, this results in the unintended consequence of draining the prosperous account you like and leaving the annoying account to sluggishly grow in its annoyance.
4. The accounting is easier.
If the IRS questions you on if you took all your RMDs, it will be easy to prove that you did your accounting properly if each account’s statement shows that its own RMD was met. Aggregating accounts makes the paper trail get matted, making it harder to follow and justify during an audit 3 years later.
So, can you aggregate RMDs? Yes, for IRAs or 403(b). No, for everything else.
Should you aggregate your RMDs? Not unless you have a really really good reason to.
Photo used here under Flickr Creative Commons.