The Fascinating World of Required Minimum Distributions

We have written extensively in the past about topics related to the IRA required minimum distribution (RMD), including using it for charitable donations. But considering the volume of questions we’re receiving from clients and acquaintances on the purpose and workings of the distributions, we decided a short, basic RMD primer was in order.

As many of you know, the RMD is a mandatory annual distribution that you must begin taking from your tax-deferred retirement accounts starting the year you turn age 70.5. RMDs apply to nearly all tax-deferred accounts, including IRAs, 401(k)s, and other accounts in an employer’s retirement trust. They do not, however, apply to Roth accounts.

The overall purpose of RMD rules is to force a slow and methodical conversion of untaxed balances held in retirement accounts into money that can be taxed. As dollars are forced out via the RMD process, the distributions are taxed dollar-for-dollar as ordinary income.

The formula for calculating your RMD is fairly straightforward: You look at the balance of your tax-deferred account (or accounts) on December 31st of the previous year, then divide that amount by your official IRS Life Expectancy Factor, which you can find on the IRS Uniform Table. If your spouse is the sole beneficiary of your account and is at least 10 years younger than you, use the factor from the Joint Life Expectancy Table II instead.

Your RMDs will continue until your death—or until your tax deferred account balances come to zero, whichever comes first. It is immensely important to begin your distributions on time and calculate the RMD amount properly. Not doing so results in a penalty of 50 percent of the balance that wasn’t distributed as required.

We encourage you to lean on the guidance of your tax professional or investment advisor for managing your RMDs. The rules are byzantine in their complexity, with details that far exceed the scope of this quick primer. It’s all too easy to make a mistake and trigger the penalty.

In the meantime, if you want to learn a little more about the nuances of RMDs, take a look at this excellent Kiplinger article, 9 Smart Strategies for Handling RMD’s.