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Required Minimum Distributions (RMD)

The amount that traditional, SEP and Simple IRA owners and qualified plan participants mus begin withdrawing from their accounts by April 1st following the year in which they reach age 70.5 are referred to as Required Minimum Distributions (RMDs).

The Internal Revenue Code established these minimums to ensure that an IRA or employer sponsored retirement plan's account balance is actually used for retirement (and not for the sole purpose of passing on to heirs). Unless an earlier date is specified by the plan, one must take their first withdrawal (RMD) from the account by:

If you defer your first RMD payment until April 1, you must take your second RMD payment by 12/31 of that same year. In each subsequent year, the RMD must be made on or before 12/31. If an RMD is not taken each year, the IRC imposes a 50% penalty tax on the amount that should have been withdrawn in each calendar year. This tax is in addition to regular income taxes.

A few employer sponsored retirement plan accounts may require that distributions always begin at age 70.5, and in some situations employees may defer the start date to age 75 for values accumulated in a 403(b) plan as of 12/31/86.

For multiple IRAs or qualified plans...
If an individual has multiple IRAs, the RMD must be calculated for each IRA. However, the total required distribution may be made from any one or a combination of the IRAs. The IRAs may not be aggregated with employer sponsored plans. For qualified plans, each plan must make its own separate RMD.

IRS 2002 Ruling
On April 17, 2002, the IRS issued final regulations relating to RMDs from retirement accounts (401k, 403b, IRAs) which became effective 1/1/03. These rules indicated new life expectancy tables (Uniform Lifetime Table) with longer expectancy factors that will generally result in smaller RMD amounts. These rules eliminated the need to make elections for life expectancy or calculation method as under the old rules. Under the final regulations, you can designated a beneficiary or change a designation after you reach age 70.5 without affecting your RMD calculation in most cases. However, it is always a good idea to keep beneficiaries up to date. The rule changes may also help the beneficiaries reduce their RMDs.

How are RMDs Calculated?
Generally, the RMD is determined by dividing the adjusted market value of the tax-deferred retirement account as of December 31st of the prior year by an applicable life-expectancy factor taken from the Uniform Life Table.

If a spouse is more than 10 years younger and he/she will be the sole primary beneficiary for the entire distribution calendar year, the Joint Life Expectancy Table  is used to calculate the RMD. This will result in a smaller RMD than with the Uniform Life Table.
RMDs are not eligible rollover distributions and may not be rolled over into an IRA or employer-sponsored retirement plan.
You can take more than your RMD from a retirement plan in a given year, subject to the plan's withdrawal provisions. If you take more than your RMD in a given year, you may not apply the amount in excess of the RMD toward your RMD for the subsequent year.
If you continue to work beyond age 70.5 and do not own more than 5% of the business you work for, you may be able to defer taking distributions from your employer sponsored retirement plan until April 1st of the calendar year after the year in which you retire. Please consult with your Plan Administrator to determine your Required Beginning Date. If you are still working and have other tax-deferred retirement accounts in addition to your current employer's workplace savings plan, you must satisfy you RMD for those other accounts earch year after you reach age 70.5.

Last Updated: 9/23/2012 10:05:00 PM