Understanding Required Minimum Distributions

Posted by Mark Piquette on December 12, 2014

Most IRA account holders are probably aware that they need to withdraw some amount of money from their account after they reach a particular age. This amount of money is known as a Required Minimum Distribution (RMD). But the specifics of the rules, which do not apply to Roth IRAs, can be difficult to understand. A recent Genius Session may offer confused IRA investors some clarity.

One common source of confusion in understanding RMDs is what’s known as the Required Beginning Date—the date by which an IRA owner must begin receiving distributions. The RBD occurs on April 1 in the year after the account owner reaches the age of 70.5. The above graphic helps to illustrate this point. Even though John and Mary turn 70 in the same year, Mary’s RBD is after John’s because she doesn’t reach the age of 70.5 (ie, 70 years and 6 months) until the following calendar year.

Determining the amount of the RMD is mainly a matter of simple division. The RMD is equal to the value of the account on December 31st of the prior year divided by what’s called the life expectancy factor, which is determined by the IRS. The one caveat in this calculation: the account value needs to be adjusted for any outstanding rollovers, transfers and conversion recharacterizations.

IRA beneficiaries have similar rules to follow. Beneficiary options are determined by when the account owner died. If the account owner died before the RBD, beneficiaries can choose between two ways of calculating the RMDs—the life expectancy method or the five-year method. (Investopedia offers a clear explanation of the five-year rule.) If the account owner died on or after the RBD, the life expectancy method is used.

For more information on RMDs, including an explanation of life expectancy tables and rules on aggregating RMDs from multiple accounts, you can watch the webcast of the Genius Session here.

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