Calculating Required Minimum Distributions

According to the IRS, a Required Minimum Distribution (RMD) is the minimum amount of money a retiree must withdraw yearly beginning with the year in which he or she retires or when age 70 ½ years of age is reached, whichever is later.

When a person reaches age 70 ½, they are generally required to withdraw the minimum amount on their retirement plan account in which tax-deferred assets or tax-deferred earnings were contributed.  Some of these accounts include:

  • Traditional IRAs
  • Rollover IRAs
  • SEP IRAs
  • Most Keogh accounts
  • Most 401(k) and 403(b) plans

If an IRA is inherited, there are special rules pertaining to withdrawing funds based on the death of the original owner.

Are There Exceptions to the RMD Rule?

One exception to this rule is a ROTH IRA because contributions are made after taxes are taken out and withdrawals after age 59 ½ are tax-free.  Also, RMD requirement withdrawals are not satisfied by ROTH IRA withdrawals.

A second exception is a retirement plan account for those ages 70 ½ or older who do not own more than 5% of the business they are working for and continue to work.  These individuals may be able to defer taking RMDs until the year after retiring.  

How is an RMD Determined?

First, begin by calculating the applicable life expectancy factor.  This number is found on the Uniform Lifetime Table.  Then divide this number into the adjusted market value of the tax-deferred retirement account as of the last day of the previous year.  

There are also RMD calculators that can automatically figure this number for an individual.

Does a Spouse Affect the Amount Taken Yearly?

Yes.  Depending on the age of the spouse compared to the age of the owner, the distribution amount can be different.  If a spouse is 10 years younger than the owner of the account and is the sole primary beneficiary, then a Joint Life Expectancy Table is used to calculate the RMD.  Often, the required amount is less than the amount for a spouse who is within 10 years of age.

How Are RMDs Taken if There Are Multiple Non-Roth Accounts?

If there is more than one non-Roth IRA owned, each IRA RMD must be calculated separately yearly.  However, the total can be taken from one IRA for the RMD amount.  For qualified plan accounts, such as a 401(k) or 403(b), these must be calculated and RMDs withdrew separately from IRAs.  The qualified plan accounts, if there is more than one, must have funds calculated and withdrawn separately, unlike IRAs.

If more than one IRA is owned, consolidation through a rollover may be advisable in order to better manage RMDs.  This can be completed after retirement.

How Often Are Funds Withdrawn from RMDs?

Funds must be withdrawn at least once a year, but can be taken periodically throughout the year.  However, the total annual minimum amount must be withdrawn by the last day of the year.  One exception to this rule is the very first year an RMD is taken after retirement.  The date for the first withdrawal for the first year after full retirement moves to April 1st.  

What Happens If the Full RMD Amount is Not Taken?

A severe penalty for not withdrawing the full RMD amount can equal 50% of the amount not taken.  If a retiree has discovered that they have not taken the full amount, IRS Form 5329 can be filed to obtain an exemption.  Consultation with a tax professional is advised.

What If a Person is Still Working?

In some cases, RMDs can be delayed from certain retirement plans, such as 401(k), 403(b), or Keogh employer-sponsored retirement plans, until retirement.  However, this only pertains to current employers’ plans.  For previous employer’s plans, RMDs must be satisfied when age 70 ½ is reached.

If a Person is Still Working Past Age 70 ½, Can Contributions Still Be Made to an IRA?

The only exception is contributions made to a Roth IRA.  These accounts are not subject to RMDs as long as the original owner is still living.  Contributions to Roth IRAs after age 70 ½ can be made as long as there is compensation and income eligibility requirements are met.

How Important Is It When Choosing Beneficiaries When Taking RMDs?

Very important.  Since retirement accounts pass outside the instructions of a will, the beneficiary will receive the retirement assets upon death of the owner.  There are additional opportunities for these beneficiaries to lengthen the growth of these assets once ownership passes to them.  

How Is a Beneficiary Named?

Any individual, charity, estate, or other entity named to receive any asset upon death of the owner can be done easily by contacting the company with which the asset is managed.

Should Traditional IRAs Be Converted to a Roth IRA?

Any Roth IRA can be converted to a Traditional IRA at any time and at any age.  If the owner is over 70 ½ at the time of transition, they will need to take the RMD before the conversion takes place.  

What is a Qualified Charitable Distribution (QCD)?

A QCD is a transfer of funds directly to a qualified charity from an IRA custodian.  QCDs can be counted toward RMD amounts for the year.  Extended in 2015, QCD distribution must meet all qualifications:

  • Taxpayer must be over 70 ½
  • Distributions cannot exceed $100,000 per year
  • Distributions are made directly to the named charity
  • Each recipient charity provides written receipt and is qualified as a 501(c)(3) organization per IRS regulation

Considerations when making a QDC:

  • Donations to qualified charities count toward required distributions for the year
  • Married couples filing a joint tax return can exclude up to $200,000 ($100,000 from each spouse’s IRA)
  • Inherited IRA donations are eligible from beneficiaries age 70 ½ or older
  • Donations from a Roth IRA are eligible
  • Donations from an ongoing SEP or SIMPLE IRA are not eligible

Private foundations, donor-advised funds, or supporting organizations do not qualify.  It is advisable to consult a tax professional for specific questions pertaining to this type of exemption.

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