I’ve made the observation before – IRAs are like belly-buttons: just about everyone has one these days, and quite often they have more than one. Wait a second, maybe they’re not quite like belly-buttons after all. Oh well, you get the point – just about everyone has at least one IRA in their various investment holdings, and these accounts will eventually be subjected to Required Minimum Distributions (RMD) when the owner of the account reaches age 70 1/2.
So what are RMDs, you might ask? When the IRA was developed, it was determined that there would be a requirement for the account owner to withdraw the funds that had been hidden from taxes over the lifetime of the account, in order for the IRS to begin benefitting from the taxes that would be levied against the account withdrawals. A schedule was prepared, which approximates the life span of the account owner, and prescribes a minimum withdrawal amount for each year that the account owner is alive, until the account is exhausted.
A participant in a traditional IRA (Roth IRAs are not subject to RMD rules) must begin receiving distributions from the IRA by April 1 of the year following the year that the participant turns age 70 1/2. In other words, assuming that the participant reaches age 70 during the months of January through June of 2009, means that the participant reaches age 70 1/2 during the 2009 calendar year, so RMDs must begin by April 1, 2010. An individual who reaches age 70 during the latter half (July through December) of 2009 does not reach age 70 1/2 until the 2010 calendar year, and as such, RMDs must begin by April 1, 2011. Note: for tax year 2009, RMD requirement has been suspended. See here for more details.
After that first year’s RMD is taken, the second year’s must be taken by December 31 of the same year. In our examples above, the first participant must take an RMD by April 1, 2010, and another by December 31, 2010. The second participant must take an RMD by April 1, 2011 and another by December 31, 2011. For all subsequent years, the RMD must simply be taken by December 31 in order to be credited for that year.
Calculation of the RMD is fairly straightforward, although there is some math involved. For the first year of RMD, the participant will be age 70, and according to the Uniform Lifetime Table (See IRS Publication 590 for more detail on other tables), the distribution period is 27.4 for 2009. So if an individual participant has IRAs worth $100,000 at the end of the previous year, dividing that balance of $100,000 by 27.4 produces the result of $3,649.64 – the RMD for that first year. Each subsequent year, you would take the balance of the accounts on December 31 of the previous year and divide them by the distibution period from the Uniform Lifetime Table, and make sure that you take a distribution of at least that amount during the calendar year.
Now, I made a point of indicating that you calculate your RMD based on the balance of all of your IRAs. This is because the IRS considers all of your traditional IRAs as one single account, and you are required to take RMD withdrawals based on the overall total of all accounts. This withdrawal can be from one account or evenly from all accounts, or in whatever combination you wish, as long as you meet the minimum.
Another point that is extremely important to note: taking these distributions is a requirement. Failing to take the appropriate amount of distribution will result in a penalty of 50% (yes, half!) of the RMD that was not taken. So, as you can see, it really pays to know how to take the proper RMD withdrawals – the IRS has very little sense of humor about it.
Understand that the examples I’ve given are for simple situations, involving the original owner of the account and no other complications. In the case of an inherited IRA or other complicating factors, or if the account is an employer’s qualified plan rather than an IRA, many other factors come into play that will change the circumstances considerably. If you need help on one of these more complicated situations, let me know and I’ll be happy to work with you on it.
Click the link to pick up a copy of An IRA Owner's Manual or if you'd prefer the Kindle version (and let's face it, ALL the cool kids do!), you can find that at this Kindle version link.
I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author
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