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What is Required Minimum Distribution (RMD)?

2016-11-21T15:46:23+00:00

The term 'Required Minimum Distribution (RMD)' is included in the Investments edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

The Required Minimum Distribution is a concept that pertains to retirement accounts and IRS rules which govern their distributions. Many individuals are not aware that they can not simply choose to hold retirement money in their retirement vehicle forever. They must begin accepting withdrawals from their traditional IRA, SEP IRA, Simple IRA, or other type of retirement plan and account after they turn age 70 ½. The notable exception to this rule is for Roth IRAs, which do not mandate disbursements while the owner is still alive.

The required minimum distribution is literally the minimum legal dollar amount that account holders have to take out of the retirement account every year. Naturally most people choose to withdraw a larger amount than this required minimum. Withdrawals that are received must be detailed in the individuals’ taxable income. The exception to this is for any income that had been previously taxed as with Roth IRA contributions or any earnings which accrued on a tax free basis. This relates to distributions from Roth IRA accounts.

Figuring out the actual amount of the RMD is not so easy. The simplest way to do it is to work with the IRS published Uniform Lifetime Table. In this method, people figure their RMD in any given year by taking the balance from the end of the prior calendar year and dividing this amount by a distribution period taken from the Uniform Lifetime Table. There is also a different table to be utilized if the owner of the account’s spouse is the only beneficiary and he or she is at least ten years younger than the owner.

The IRS provides worksheets on their website to help account holders figure up the mandated minimum amount. They also provide several tables to help with this. As mentioned, the Uniform Lifetime Table is for every IRA account owner who is figuring up his or her own withdrawal. The Joint Life and Last Survivor Expectancy Table is for those whose spouse is at least ten years younger and who is the only beneficiary.

The initial date for the first RMD on an IRA is figured out by taking the April 1st of the year that comes after the calendar year in which the account holder turns 70 ½. With a 401(k), 403(b), profit sharing plan, or similar defined contribution plan, either this same April 1st deadline applies or the April 1st that follows the calendar year in which the owner actually retires.

The individual turns 70 ½ on the calendar date which falls 6 months following his or her 70th birthday. The plan terms themselves govern whether the individuals can wait until the year in which they actually retire to take the initial RMD. Other plans will require distributions begin on the April 1st following the year of turning 70 ½ whether or not the person has retired.

Once account holders have received the first RMD, they must take their subsequent ones on or before December 31st. It is possible to avoid having the first and second RMD’s included in a single tax year. In the year individuals turn 70 ½ they can simply go ahead and take that first RMD by the end of the year to avoid the double distribution taxation in one calendar year.

People who do not take their full minimum required distribution will suffer an IRS penalty. Any amount which they do not take as the law requires will suffer a 50% excise tax that will be levied on it. This failure to take the RMD must be reported on a Form 5329, Additional Taxes on Qualified Plans.

The term 'Required Minimum Distribution (RMD)' is included in the Investments edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.