in 5 Easy Steps

What is a RMD (Required Minimum Distribution)?

An RMD is the minimum amount that must be withdrawn from a retirement account each year.

When are you subject to Required Minimum Distributions?

Traditionally, IRA owners are subject to RMDs beginning in the year in which they turn 70 1/2. Beneficiaries of IRAs and/or Roth IRAs are subject to RMDs beginning in the year after the year of the IRA (or Roth IRA) account owner’s death.

Here’s the Solution…

1. Determine the distribution year. The distribution year is the year for which you are taking a distribution, NOT necessarily the year in which the distribution is taken. An individual turning 70 1/2 in 2010 does not have to take their first RMD until April 1, 2011. If he or she waits and takes the distribution on April 1, 2011, the distribution is still for a 2010 distribution. After the year an IRA owner turns 70 1/2, all distributions should be made in the same year they are actually taking them.

2. Find the retirement plan balance. Use the balance as of December 31st of the year prior to the distribution year. Add any outstanding rollovers and recharacterizations.

3. Determine the life expectancy factor. Most IRA owners look up their age on the Uniform Lifetime Table in order to determine their factor. If a spouse is the sole beneficiary of an IRA account for the entire year and is more than 10 years younger than the account owner, the Joint Life Expectancy Table is used. Make sure to look up the actual ages (as of the last day of the year) of the owner and the spouse. Most beneficiaries look up their life expectancy in the year after the year of the account owner’s death using the Single Life Table. Going forward each year that factor would simply be reduced by one (there are some exceptions for spousal beneficiaries).

4. More mathematics. Divide the retirement plan balance (step 2) by the life expectancy factor (step 3). The result is the RMD that must be taken. Be sure to take the RMD by December 31st of the distribution year (except IRA owners in the year they turn 70 1/2). REMEMBER there is a 50% penalty for any portion of a RMD that is not taken.

5. Take notice. If you have multiple accounts, RMDs from owned IRAs can be taken from any combination of the accounts; RMDs of inherited IRAs from the same person can also be taken from a combination of the inherited IRA accounts.