The IRS has proven Ben Franklin right: paying taxes is inevitable - certainly when it comes to your retirement assets. You can defer paying some income taxes by refraining from distributing your retirement assets, but you can't do this indefinitely. The IRS requires you to begin receiving
required minimum distributions (RMD) in the year you reach age 70.5, and an understanding of these requirements will help you avoid IRS penalties.
Affected Retirement Accounts
For retirement account owners, the RMD rules apply to
Traditional,
SEP and
SIMPLE IRAs,
qualified plans and
403(b) accounts. For the purposes of this article, the term Traditional IRA will include also SEP and SIMPLE IRAs. The RMD rules do not apply to
Roth IRA owners, but they do apply to Roth IRA
beneficiaries, which we discuss in
part 2 of this series.
When You Must Begin You must start receiving distributions from your retirement account by the
required beginning date (RBD). Generally, your RBD is April 1 of the year following the year you reach age 70.5. If you are still employed at age 70.5 and you participate in a qualified plan or 403(b) account, you may be allowed to defer the start of your RMDs until after you retire. This exception, however, does not apply if you own at least 5% of the business that adopted the plan. Your plan administrator should be able to tell you if the plan allows this deferment.
Age 70.5 Determination Determining when you reach age 70.5 is as important as it is easy. The RMD regulations explain that you reach age 70.5 six months after the 70th anniversary of your birth. For example, if your date of birth is June 30, 1940, the 70th anniversary of your birth date is June 30, 2010, and you reach age 70.5 on December 30, 2010. Since you reach age 70.5 during 2010, your first RMD must be distributed by April 1, 2011. If you reach age 70 between June 30, 2010, and December 31, 2010, then you become 70.5 during 2011, and your RBD is April 1, 2012.
Example 1
Jack and Jill both own IRAs. Jack was born on June 30, 1940. Jill was born on July 1, 1940. They both reach age 70 in 2010 but 70.5 in different years: Jack reaches 70.5 on December 30, 2010, and Jill on January 1, 2011. Jack must therefore begin his RMD by April 1, 2011, while Jill may wait until April 1, 2012. |
Subsequent RMDs Only the first RMD may be delayed until April 1 of the following year. All subsequent RMDs must be distributed by December 31 of the year to which it applies. If in the above example Jack took his 2010 RMD on April 1, 2011, he would also be required to take his 2011 RMD by December 31, 2011. This means that Jack would have had to include both RMDs in his income for 2011, the year in which the distributions occurred.
Calculating Your RMD Amount If you participate in a qualified plan, your plan administrator will assist you by calculating your RMD amount. If you are a Traditional IRA owner, your IRA custodian must notify you when an RMD is due from your account for the year, but is not required to tell you the RMD amount due. Should you need to determine your RMD amount, you may use the following formula:
IRA's previous year-end fair market value (FMV) / Distribution period
Previous Year's FMV
Your IRA custodian should send you the previous year's FMV of your IRA by January 31 of the year following the current year. Therefore, your 2010 FMV must be mailed to you by January 31, 2011. However, the amount reflected on your FMV statement may be incorrect if the following occurred:
- You received a distribution during the previous year and rolled it over during the current year. (It is possible to distribute an amount on December 31 and rollover the amount in February of the next year.)
- You converted an amount to a Roth IRA during the previous year and recharacterized the amount during the current year.
If any of these situations exists, you must add the rollover or recharacterized amounts to the FMV you receive from your IRA custodian to determine the correct RMD amount.
Distribution Period
Your distribution period (or life-expectancy factor) is based on IRS-issued tables, which factor-in your age, your beneficiary's age, and your relationship (spouse or non-spouse) with your beneficiary. There are three tables (all three of which you can find in Appendix C of IRS Publication 590):
- "Single Life Expectancy"
- "Joint Life and Last Survivor Expectancy"
- "Uniform Lifetime"
For purposes of calculating your RMD amount, only "Joint Life and Last Survivor Expectancy" and the "Uniform Lifetime" may be used. The "Joint Life and Last Survivor Expectancy" is used if you have a spouse beneficiary who is more than 10 years younger than you. In all other cases, the "Uniform Lifetime" must be used. |
Example 2
John is age 73 this year. John's beneficiary is his spouse, Janet, who is age 50. Since Janet is John's spouse and more than 10 years younger than him, John may use the "Joint Life and Last Survivor Expectancy" table to calculate his RMD. Based on the tables, John and Janet's joint life expectancy is 34.8 years - see the table below, which demonstrates how to find this number. John's year-end FMV for last year is $158,225, so his RMD amount for this year is $4,547 ($158,225 / 34.8 = $4,547). |
Example 3
The facts are the same as in example 2, except that Janet is age 72. Since Janet is not more than 10 years younger than John, he must use the "Uniform Lifetime" table to calculate his RMD. Based on this table, John's distribution period is 24.7 years - see the table below, which demonstrates how to find this number. John's RMD amount for this year is $6,406 ($158,225 / 24.7 = $6,406). |
Penalty for Failure to Take RMD
As we mentioned earlier, your first RMD is due by April 1 of the year following the year you reach age 70.5. All subsequent RMDs must be taken by December 31 of each applicable year. If you fail to take the RMD by the applicable deadline, you will owe the IRS a 50%
excise tax on the amount you fail to take. For instance, if your RMD this year is $50,000 and you distribute only $30,000 (which $20,000 under the RMD) by the applicable deadline, you will owe the IRS $10,000 (50% of $20,000). The excise tax must be reported on IRS Form 5329, which may be obtained at
www.irs.gov.
Request for Reprieve
If you feel the failure to take the RMD amount by the deadline is due to a reasonable error, you may write to the IRS and attach your letter to the Form 5329. If the IRS denies your request, they will notify you in writing , and include information about how you should remit the penalty amount to them
Conclusion As you can see, it is important to understand the IRS requirements on when you must start taking distributions from your retirement account. To avoid any penalties, you need to determine the date on which you reach age 70.5 and the amount of your RMD. There are, however, some further rules that could affect your RMD amount, which we discuss in
part 2.
Note: RMDs for IRAs and defined contribution plans were waived for 2009. As such, individuals need not take distributions from these plans until 2010, unless they want to do so.
by Denise Appleby (Contact Author | Biography)
Denise Appleby is a retirement plans consultant, freelance writer and editor. Before starting her own business, Appleby Retirement Consulting, Denise worked for Pershing LLC for almost 10 years. While at Pershing, Denise rose to the rank of vice president, and held many positions including retirement plans product manager, manager of the retirement plans technical assistance group and retirement plans training manager. Appleby Retirement Consulting provides technical assistance to financial institutions and financial professionals; content for newsletters, websites and magazines; and technical editing services for books and other retirement plans material. Denise holds several retirement professional designations.
