Taking the IRA Required Minimum Distribution

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.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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6 Comments

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  • Murray –

    First of all, you are not required to take minimum distributions from your IRAs until you reach age 70 1/2, which will be January 7, 2012. So you do not have to take an RMD in calendar year 2011.

    Regarding your TDA, if it’s an employer-sponsored plan (probably a 403(b) plan), as long as you’re still working you should not have to take RMDs from this plan.

    Regarding your quest for a “dollars and cents” answer of how much to withdraw, this requires the total balance as of December 31 of the year prior to the year in which you’re taking the RMD. Then you would use the appropriate life table (see IRS Publication 590) and apply the factor based upon your age to that balance in your account(s). This will give you the “dollars and cents” of the RMD for that year.

    Hope this helps –

    jb

  • 7/18/2011
    Dear Sir:

    I was 70 on JULY 7,2011. i HAVE 3 bank IRAs sum total approx. $37K. In dollars and cents, how much would I have to withdraw as a minimum distribution, and when does it have to be withdrawn> Also, I am working full time and have a tax deferred annuity–all in bonds total approx. $204K. Would I have to make a minimum withdrawal from this as well? If so, when would I have to do it and in dollars and cents how much would I have to withdraw? I appreciate any information you can give. No one seems to know the dollars and cents amount to be withdrawn. One accountant said it is related to life expectancy. I’m, in a quagmire as to the right thing to do. –MMK

  • John, I appreciate your kind words. It is nice to know that folks are benefiting from my efforts here.

    jb

  • Jim,

    Thanks for taking the time to answer my question regarding RMD rules as they apply to Non IRA Qualified Plans and Simple IRA accounts. You have provided the exact info I needed in simple easy to follow layman’s terms, a feat not too common in this day and age of government double speak. I am forwarding your post to several of my fellow retirees who also have been asking the same question. Thanks for all of us out here who are lost in this sea of government regulation. Your service is above and beyond…. Have a great day!!!

    John Triandafils

  • John –

    Each 401(k) (or other non-IRA Qualified Retirement Plan) is considered separately for Minimum Distribution purposes. IRAs, on the other hand, are considered collectively for Minimum Distribution.

    So, for example, if you had 401(k) accounts at Company A and Company B, and IRA accounts at Company C and Company D, you would need to take a Minimum Distribution of the account at Company A (401(k) account), Company B (401(k) account) and either Company C or Company D (IRA accounts). You could also take the IRA distribution from each of Company C and D IRAs separately if you wish.

    In your case, from your description, it appears that you have one IRA and one 401(k) or other employer plan. With this situation, unless you rollover the 401(k) plan to an IRA (either your existing one or a new one), you will need to take a separate Minimum Distribution from each account.

    Hope this helps –

    jb

  • Jim,

    I am receiving multiply opinions as to the proper or mandatory account(s) from which an annual RMD must be withdrawn.

    I have both a conventional Savings Bank IRA (CD’s) as well as an employer based qualified plan.

    I would prefer to take the entire RMD (based on both values) from only my Bank IRA and leave the Employer Plan funded.

    Is this permitted or must I take a prorated proportion from each of the above.

    Thanks for your assistance
    John

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