The 10 Fundamental Laws of RMDs

After reaching age 70½ retirement account owners are generally required to start taking withdrawals from their IRA or other retirement plans.  These withdrawals are commonly referred to as required minimum distributions (RMDs), and like anything governed by the IRS, come with a great deal of rules and exceptions, to-wit:

1.  RMDs start at a particular time.

The starting point for lifetime required distributions is approximately age 70½.

2.  Annual distributions must be taken by December 31 each year.

Once RMDs begin, the participant must take a distribution every calendar year, no later than December 31. Reg. § 1.401(a)(9)-5, A-1.  There are several exceptions to this rule.  First, the five-year rule does not require annual distributions.  Second, in the case of certain lifetime RMDs, the distribution for the first Distribution Year can be postponed until the Required Beginning Date.  Finally, there are even more unusual situations in which an RMD can be delayed beyond December 31.

3.  Each year’s RMD is determined by dividing the prior year-end account balance by a factor from an IRS table.

RMDs are computed by dividing an annually-revalued account balance by an annually-declining life expectancy factor.  Reg. § 1.401(a)(9)-5, A-1(a).  The factor obtained from the applicable IRS table is sometimes called the Applicable Distribution Period (“ADP”) or divisor.

4.  There is no maximum distribution.

The formula tells you the minimum required distribution.  The rules impose no maximum distribution; the participant or beneficiary is always free, as far as the IRS is concerned, to take more than the minimum.

5.  Taking more than the required amount in one year does not give you a “credit” you can use to reduce distributions in a later year.

Each year stands on its own.  Reg. § 1.401(a)(9)-5, A-2.  Taking larger distributions in one year indirectly reduces later RMDs by reducing the account balance.

6.  The plan may be stricter than the regulations.

Just because a participant or beneficiary qualifies for the life expectancy payout method under the law does not mean he will actually get to use it; the plan must allow it as well.

7.  The RMD cannot exceed 100% of the account balance.

“…[T]he required minimum distribution amount will never exceed the entire account balance on the date of the distribution.” Reg. § 1.401(a)(9)-5, A-1(a).  This rule helps if investment losses have caused the account to decline in value so much that the total value is less than the RMD for the year.

8.  Distributions before the first Distribution Year don’t count.

The first year for which an RMD is required is called the “first Distribution Year.”  Distributions in years prior to that year have no effect on the computation of the RMD for the first (or any other) Distribution Year.  Reg. § 1.401(a)(9)-2, A-6(a).

9.  Distribution period does not involve an election.

With one exception, determination of the ADP for benefits, either during life or after death, does not involve an “election” on the part of the participant or beneficiary.  The exception is, if the participant dies before his Required Beginning Date, leaving his benefits to a Designated Beneficiary, the beneficiary may have to elect between the life expectancy payout method and the 5-year rule.

10.  The regulations “overrule” the Code.

You cannot compute an RMD simply by following the Internal Revenue Code.  The IRS regulations have fundamentally altered the Congressional scheme in several ways.  For example, the Code dictates that lifetime distributions must be made over the life expectancy of the participant or the joint life expectancy of the participant and his beneficiary. § 401(a)(9)(A)(ii).

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The above list was an excerpt taken from the book is Life and Death Planning for Retirement Benefits, authored by Natalie Choate.