What is a Required Minimum Distribution (RMD)?

Late last week, I wrote about the House voting to suspend the required minimum distribution (RMD) for 2009 (the Senate has since voted in support of this measure). Today I thought I’d spend a bit of time explaining exactly what the RMD is for those that aren’t familiar with the term.

What is a Required Minimum Distribution?

The terms Required Minimum Distribution refers to a minimum amount that a retirement plan account owner must withdraw each year once they reach the age of 70-1/2 (or at retirement if they work past that age). The RMD rules apply to all employer-sponsored retirement plans including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEP-IRAs, SARSEP plans, and SIMPLE IRAs. Note that the RMD rules also apply to Roth 401(k) accounts, but they do not apply to Roth IRAs while the owner is alive.

How do you calculate the RMD?

RMD amounts are generally calculated for each account based on their balance on December 31st of the prior year. Calculations are based on a life expectancy table published by the IRS in Publication 590. There are also worksheets available to help with the calculations. Note that you can always withdraw more than the RMD, but that excess withdrawals cannot be credited toward your RMD in subsequent years.

When must your RMD be taken?

As noted above, RMDs have to be taken for the year in which the account holder turns 70-1/2. However, during that first year, the distribution can be delayed until April 1st of the following year. For all subsequent years, the RMD must be taken by December 31st of the year.

Where do the RMD funds have to come from?

While you have to calculate the RMD separately for each IRA account, you can withdraw the total amount from just one IRA if you wish. Likewise, if you have multiple 403(b) accounts, you must calculate the RMD for each account, but you can withdraw the total RMD from just one if you wish. For other types of retirement plans, such as 401(k) and 457(b) plans, you have to take the RMD separately for each account.

What happens if you don’t take your RMD?

If your fail to take your RMD, or don’t withdraw enough, or don’t do it in time, the amount not withdrawn will be taxed at 50%. The additional taxes are reported on IRS Form 5329. The good news is that you can get the penalty waived if you can show that the shortfall was due to a “reasonable error” and that you are taking “reasonable steps” to fix the situation. In this case, you still need to file Form 5329 (read the instruction carefully), but you should also attach a letter of explanation and hope that the IRS agrees with your definition of “reasonable.”

Why all the talk about suspending the RMD?

There has been a lot of recent attention paid to the possibility of suspending the RMD. The reason for this is that, as noted above, the RMD is based on your account balances on December 31st of the prior year. For 2008, that means that people who have waited until late in the year to take their RMD will be forced to withdraw a disproportionate amount of funds.

Take, for example, an individual whose RMD calculation amounted to 5% of their account balance as of December 31st, 2007. If that individual had an especially aggressive portfolio that has since fallen by 50%, and if they didn’t take their RMD early in the year, then the RMD amount would now equal 10% of their balance. That being said, the suspension that’s currently being bandied about won’t actually help, as it won’t go into effect until 2009.

5 Responses to “What is a Required Minimum Distribution (RMD)?”

  1. Anonymous

    Good article but I still have a few questions..
    1. I turned 70-1/2 in 2009, which normally means I would not have to take the RMD till April of 2010, although I have been advised to take the RMD in 2009 to avoid double RMDs in 2010. I assume I do not have to take any RMD in 2009..correct?
    Question: What do I do in 2010? Is it considered year one in the RMD table of distribution rates?
    Question: If it is considered year one and I use year one rate of RMD do all subsequent years follow suit?
    Question: Does the April rule still apply although it has been pushed back one year?

  2. Anonymous

    Please clarify. My husband and I both reach 70-1/2 in 2009. With the waiver we can delay RMD to 2010. My question, in 2010, and we going to have to take out for 2 years, 2009 and 2010,or just one RMD.

    Waiting on your response.

  3. Anonymous

    This was interesting. I had assumed this suspending the RMD changes would only really benefit the well off, those who could afford to live without a distribution.

    After reading this I realize that it goes even deeper than that, not allowing people to live off of less in these hard times.

    Thanks for the explanation!

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