IRA RMD Reporting

So we’ve talked about how to calculate your Required Minimum Distributions (RMD) from your IRA and when you must take it. But how does the IRS know that you’ve done what you’re supposed to? How does RMD reporting work? As you might expect, the IRS doesn’t leave it to chance. They know exactly what you’ve done or not done.

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When you receive a distribution from an IRA, a Form 1099-R is generated at the end of the tax year.  If the distribution is for your RMD for the year (treated as a normal distribution) there will be a Code of 7 in Box 7 of the form.  This will be true of any amount that you receive from your IRA in a “normal” distribution.  The amount of the distribution will be found in Box 1 of the form, and the taxable amount will be in Box 2.

Photo credit: jb

In addition, Form 5498 will be generated for your IRA and sent to you by January 31 of the following year – meaning, if you receive a 5498 before January 31 of the current year, it is relating to an IRA balance as of December 31 of the prior year.  This statement will detail the amount of your RMD if you’re over age 70½ (or over 72 beginning in 2021).

Both of these forms are filed with the IRS at the same time that they’re sent to you. So the IRS simply cross-references the distribution (Form 1099-R) with the balance information from Form 5498, thereby making sure that you have taken the appropriate distribution. It’s not always as simple as that, since the IRS must aggregate all of your IRA balances together, as well as all of your distributions, before making the calculations.

If you haven’t taken the distribution as you should have, you’ll receive a communication (often a year or two later) from the IRS asking what’s up (in so many words). The unfortunate problem is that you’ll be subjected to a 50% penalty for not taking the RMD in a timely manner – quite an exorbitant amount, you’ll agree.

Do I have an RMD reporting requirement?

So when you take the distribution, is there a check-box or something for RMD reporting? Maybe something that says the distribution is an RMD? The answer is no. When you’re subject to RMDs, the first money that you take out of your IRAs is counted toward satisfying your RMD for the year. As long as you take that required amount out, whether from one IRA or all of your IRAs together, the RMD is satisfied.

For employer plans, including 401(k), 457, and SEP/SIMPLE plans, you must take the RMD from each account separately, they’re not aggregated like IRAs are, nor are they lumped together with IRAs. 403(b) plans may be aggregated like IRAs can be, but not aggregated with IRAs. Just keep this in mind as you plan your distributions for the year.