– contributed by Chad Zagel, AAMS®, Financial Advisor, Edward Jones
A required minimum distribution (RMD) is the amount that traditional, SEP and SIMPLE IRA owners and qualified plan participants must begin withdrawing from their retirement accounts by April 1 following the year they reach age 70 ½. An RMD amount must then be distributed each subsequent year. The information below addresses RMDs for the original account holder.
Required Beginning Date (RBD)
Once you turn 70 ½, you must begin taking minimum distributions from your retirement accounts. It is important to remember that this is only a “minimum” distribution, and the account owner may always take a larger amount. The first distribution must be taken by April 1 of the year after you turn 70 ½. The second distribution must be satisfied by Dec. 31 of that same year. All future distributions must be satisfied by Dec. 31 of subsequent years.
Example
Sue turned 70½ in 2014. She is required to take an RMD from her IRA by April 1, 2015. The 2015 distribution must be taken by Dec. 31, 2015. All future distributions must be taken by Dec. 31 of subsequent years. If Sue failed to remove the RMD, she would owe ordi- nary income tax plus a 50% penalty on the portion that should have been removed.
Determining the RMD
In most cases, the Uniform Lifetime Table is used to determine the RMD. The only exceptions are for spouse beneficiaries who are more than 10 years younger, when the spouse is the sole beneficiary, and for the beneficiary of an inherited IRA. The Joint and Survivor Life Expectancy Table is used to calculate an RMD for an individual if the sole beneficiary is a spouse more than 10 years younger than the account holder. Ask your financial advisor for a copy of the table to determine the RMD for these situations.
| RMD = | Dec. 31 Account Balance
Life Expectancy Factor |
Life Expectancy Factor is the number of years a person is expected to live based on a current age.
Example
John turned 70½ in 2014. He used his Dec. 31, 2013, account balance to calculate his RMD. This would hold true even if John had elected to defer his first distribution until April 1, 2015.
If an account holder takes an IRA distribution within the last 60 days of the year and subsequently rolls all or part of this distribution to an IRA after the beginning of the following year, the rollover amount must be added to the prior year-end balance to calculate the RMD.
Spouse Beneficiary Less Than 10 Years Younger
If an account holder has a spouse beneficiary less than 10 years younger, he or she uses the Uniform Lifetime Table each year to determine the life expectancy factor.
Example
Mary was born on Jan. 1, 1942. Her beneficiary is her spouse, Jim, whose birthday is Jan. 29, 1942. To determine Mary’s 2014 distribution, she used the Uniform Lifetime Table to find the factor for a 72-year-old, which is 25.6. Assuming her account balance at Dec. 31, 2013, was $200,000, her 2014 RMD was $7,812.50. Non-spouse Beneficiary – Uniform Lifetime Table If an account holder has a non-spouse beneficiary, he or she uses the Uniform Lifetime Table each year to deter mine the life expectancy factor. Example Mary was born on Jan. 1, 1942. Her beneficiary is her son, David, whose birthday is Oct. 6, 1965. To determine Mary’s 2014 distribution, she used the Uniform Lifetime Table to find the factor for a 72-year-old, which is 25.6. Assuming her account balance at Dec. 31, 2013, was $200,000, her 2014 RMD was $7,812.50.
Entity Beneficiary
When an entity such as an estate or a charity is the named beneficiary, the account holder uses the Uniform Lifetime Table to compute his or her RMD.
Example
Mary was born on Jan. 1, 1942. She named her estate as the beneficiary. To determine Mary’s 2014 distribution, she used the Uniform Lifetime Table to find the factor for a 72-year-old, which is 25.6. Assuming her account balance at Dec. 31, 2013, was $200,000, her 2014 RMD was $7,812.50.
Effect of Beneficiary’s Death on RMD
When a beneficiary passes away before the account holder, the account holder can name another beneficiary without negatively impacting his or her RMD. In most cases, the account holder can simply name a new benefi ciary and continue using the Uniform Lifetime Table.
If the deceased beneficiary was a spouse who was more than 10 years younger and the new beneficiary is a non-spouse or entity, the account holder would use the Joint and Survivor Life Expectancy Table in the year of the beneficiary’s death because marital status is determined on Jan. 1. Distributions in future years would be calculated using the Uniform Lifetime Table.
If the deceased beneficiary was a non-spouse or spouse within 10 years of the age of the account holder and the new beneficiary is a spouse who is more than 10 years younger, the account holder would use the Uniform Lifetime Table in the year of the beneficiary’s death, not the Joint and Survivor Life Expectancy Table. Distributions following the year of marriage would be calculated using the Joint and Survivor Life Expectancy Table.
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