Distribution Rules

RMD FORMULA:

To calculate your Required Minimum Distribution (RMD) you divide your account balance at the end of the previous year by the distribution period for your age shown in the following table.  The resulting number is the amount you must withdraw during the current year to avoid the 50% penalty on any amount not withdrawn that should have been.

For example, if your account balance at the end of 2001 is $100,000 and you  turn age 72 in 2002, your RMD for 2002 is $4,098.36 ($100,000 ÷ 24.4).  There is one exception.  If your spouse is (1) the sole beneficiary of your account and (2) more than ten years younger than you, you may use a joint life expectancy table instead of the uniform table.  This will result in a lower RMD than would be the case under the uniform table.

 REQUIRED BEGINNING DATE

Minimum distributions from a retirement account must start by your required beginning date.

• IRA distributions must begin by April 1 of the year following the calendar year when the owner reaches age 70-1/2.  For example, if you turn 70-1/2 in 2001, you must start receiving distributions by April 1, 2002.
• Most employees participating in a retirement plan must start to receive distributions by April 1 of the year after the year they reach age 70-1/2 or - if it is later - April 1 of the year after the year they actually retire.  However, an employee who owns more than 5% of the employer sponsoring the plan must play by the IRA rule - even if he or she continues working past age 70-1/2.

After the first year, you must take your RMD by December 31 of each following year.  So, if you turn 70-1/2 in 2001 and your required beginning date is April 1, 2002, you must take your next RMD by December 31, 2002.  You may also take partial distributions on any schedule you want and withdraw from one or more IRAs - as long as your total for each year at least equals the combined RMD from all your IRAs.

DISTRIBUTIONS AFTER DEATH

• If the inherited account has a designated beneficiary - The distribution period is that beneficiary's life expectancy.
• If there is no designated beneficiary and the account owner dies after the required beginning date - The account balance is paid out over the owner's remaining table life expectancy.
• If there is no designated beneficiary and the account owner dies before the required beginning date - The account balance generally must be distributed within five years of the owner's death. 

If you name your estate as your beneficiary, Post-death RMDs are based on your remaining table life expectancy.

The owner can change beneficiaries at any time without affecting the RMD calculation.  In fact, the identity of the designated beneficiary doesn't become final for post-death RMD purposes until the beneficiary determination date which is December 31 of the year following the year of the account owner's death.

ESTATE PLANNING OPPORTUNITIES

Tax savings may be possible if the time over which beneficiaries can take retirement account distributions can be stretched out.  A named beneficiary now has the flexibility to "pass" part or all of a retirement account to children or grandchildren by "disclaiming" his or her interest in the account.

SURVIVING SPOUSES

 A surviving spouse can choose to treat an IRA inherited from the deceased spouse as his or her own, which may result in delayed required minimum distributions.  However, the IRS will not allow this option unless the survivor is the IRA 's only beneficiary and has an unlimited withdrawal right.  Also, the election is not available if the spouse is the IRA beneficiary indirectly through a trust.

PLANNING NEED

• If you are not taking distributions, significant future tax savings may be possible with proper planning.
• If your distributions have begun, immediately recalculating your IRA's RMD for 2001 may be beneficial, as may recalculating tax-qualified retirement plan distributions - if your plan allows it.
• Or, if you are a beneficiary who has recently inherited tax-deferred money, reviewing your alternatives may prove very beneficial.