Required Minimum Distributions

All retirement plans, with the exception of Roth accounts, have required minimum distributions (RMD) beginning when the account holder turns 70 ½. More specifically, you must start receiving distributions by April 1st of the year following the year in which you reach 70 ½. Thereafter, you must take the required distribution by December 31st of each year. Consequently, the first year of required minimum distributions is on April 1st, but you must take the 2nd one by December 31st. Required distributions are fully taxable so we encourage our clients to take their first distribution by December 31st of the first year rather than waiting until April of the next year in order to spread out the tax consequence.

The rules for retirement plans can be found in Pub 590 on the IRS website. Values of all of your retirement accounts are calculated on December 31 prior to your required minimum distribution. The Uniform Lifetime Table in Pub 590 has 27.4 as the initial divisor for those aged 70 ½. If the values of your retirement accounts came to $675,400, for instance, your required minimum distribution for the first year would be $24,649.64. You can take the distribution from any of your accounts, as long as it adds up to the correct distribution. The penalty for not taking your distribution is 50% of the RMD. Each subsequent year, the divisor is reduced to reflect your longevity (26.5, 25.6, 24.7, 23.8, etc).

If the spouse is ten years younger than the account holder (and is the sole beneficiary), your divisor can be found on Table II (Joint Life and Last Survivor Expectancy). Retirement accounts pass according to the beneficiary indicated when you opened your account and not what might be in your will. Spouses inherit retirement accounts “as their own” and they take RMDs at age 70 ½. All others who inherit IRA accounts must start taking distributions immediately according to their age as listed on Table 1 (Single Life Expectancy).

Roth accounts do not have required minimum distributions for the account holder (or if a spouse inherits the Roth). All other beneficiaries of Roth accounts must take required minimum distributions. The upside to having a Roth account is that the distributions are tax free because the contributions were not tax deductible. It is a great estate tool to leave your children a tax free Roth account.

If you have any questions about your retirement account, please contact your advisor.

Barbara Gray, CFP®

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