Required Minimum Distributions
Participants in qualified retirement plans, SEP-IRA's, SIMPLE IRA's, and traditional IRA's may not accumulate tax-deferred earnings indefinitely. Eventually, they must begin to take required minimum distributions ("RMD's") from their accounts. If they fail to do so, they will suffer a hefty penalty tax of 50% of the amount that should have been paid out but was not. Example: If an owner should have taken a $40,000 RMD from his account, but took only $30,000, the penalty tax would be $5,000 (50% of the $10,000 the owner failed to take). Of course, an account owner can always withdraw more than the minimum required by federal tax law. Generally, the "required beginning date" for RMD's is April 1 of the year following the year in which the account owner attains age 70 1/2. Employees who own 5% or less of the company that maintains the retirement plan can delay the start date for RMD's until April 1 of the year following the year they actually retire, if that is later than age 70 1/2. Postponement until actual retirement is not available to: - IRA owners, or
- Employees who own more than 5% of the company that maintains the retirement plan.
RMD's from an IRA or plan account are included in the recipient's gross income as they are paid out, with a tax-free recovery of basis, if any. Generally, the account owner will not have a tax basis in the account unless he or she made nondeductible contributions to the account or reported a taxable economic benefit each year for life insurance provided through the plan (not possible in an IRA). Account owners who do not need distributions to maintain their standard of living often prefer to leave as much in their accounts as possible in order to continue to: - Defer taxation of amounts accumulated in the account, and
- Enjoy compound earnings on funds inside the account.
How much must be withdrawn annually after age 70 1/2(or actual retirement) to comply with the RMD rules? The IRS provides a table of factors, based on the account owner's age, that are used to make the annual RMD calculation in most (but not all!) situations. This table is known as the Uniform Lifetime Table. Example: At age 75, the pertinent factor from the Uniform Lifetime Table is 22.9. The owner's account balance as of the prior Dec. 31 is divided by this factor to determine the required minimum distribution for the current year. If the Dec. 31 balance were $1 million, the required minimum distribution would be $43,668.12. If the account owner has a spouse who is: - More than 10 years younger than the owner, and
- The sole beneficiary of the account in the event of the owner's death, then the Joint Life Table rather than the Uniform Lifetime Table is used to calculate RMD's during the owner's life.
Use of the Joint Life Table results in lower RMD's during the owner's lifetime. This allows more to remain in the account for the financial security of the surviving spouse, who may outlive the owner by many years. Required minimum distributions do not end at an account owner's death. The IRA or plan account must be distributed in minimum annual mounts to beneficiaries or suffer the 50% penalty tax. The minimum annual distribution amount will depend, among other things, on whether the account owner's death occurs before or after the "required beginning date," as previously defined. The rules for post-death RMD's are beyond the scope of our discussion here, and should be reviewed with your own financial and tax advisors. | 
