The Full Complexity of All Required Minimum Distribution Divisors Explained

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Among the most complicated and frustrating IRA rules are required minimum distributions (RMDs).

The government allows you to delay paying tax on traditional IRA contributions or retirement deferrals in order to encourage you to save for your retirement. But after age 70 1/2, the government requires you to take some of that money out so they can collect taxes on it. The amount the government mandates you take out of your account each year is called a Required Minimum Distribution (RMD).

RMDs are surprisingly difficult to get right. There are different tables and formulas used to calculate your RMD divisor based on your particular circumstances.

Furthermore, for the beneficiaries of IRA accounts, called Inherited IRA owners, all the RMD rules are complicated. There is no easy case.

For all RMDs, how much you are required to take out this year depends on what this year’s divisor is.

The amount which you are required to take as a distribution is based on the value of the account on December 31 of the previous year. That value is divided by a number, called the divisor, and the result is then your RMD for the year.

Most divisors are looked up in tables based on your age. Others are calculated based on last year’s divisor. Some particularly unfortunate cases have distribution deadlines rather than divisors at all.

Here is my attempt to give an overview of all of the complexity in Required Minimum Distribution divisors and how to handle each of these cases.

You own an IRA, such as a Traditional IRA, Rollover IRA, SEP-IRA, or SIMPLE IRA, and…

You are younger than 70.

Before the year you turn 70 1/2, no required minimum distributions are required for the IRA owner.

Also, Roth IRAs are not subject to RMDs for the IRA owner at any age.

You are turning 70 1/2.

The year that you turn 70 1/2 is called your “required beginning date.” This is the first year you must take a RMD.

If your birthday is between January and June, then you will turn 70 1/2 in the same year that you also turn 70. If your birthday is between July and December, then you will turn 70 1/2 in the year you also turn 71. In this way, those individuals whose required beginning date is in 2020 will be those with birthdays between July 1, 2019 and June 30, 2020.

Your first RMD must be taken after January 1 of your required beginning date year and before April 1 of the following year. The April deadline is a one-time extension of the RMD deadline for just your first year.

Normally, it is better to take your first RMD in the year your reach age 70 1/2 without delaying into the one-time extension. Delaying into the following year will require you to take two RMDs that year, increasing your taxes that much more.

You may want to delay if you are going to retire the next year. In that extremely coincidental case, postponing the first withdrawal until the year your income is lower may save you money.

You may also benefit from delaying if you are considering giving away all or most of both RMDs as Qualified Charitable Distributions (QCDs), as QCDs are exempt from taxable income anyway and then you can save time by bundling the paperwork preparation for both years.

You are older than 70 1/2.

After your first year, you need to take your RMD during the year and before December 31 every year you have an IRA balance.

…and…

Your primary beneficiary is a spouse who is more than 10 years younger.

The IRS has a quirky rule that if your 10-years-or-more younger spouse is your sole primary beneficiary, then you can use the lower Joint Divisor based on both your life expediencies rather than just yours.

The Joint Divisor is an alternate and more favorable RMD calculation. If you are a mixed-decade couple, take advantage of the Joint divisor by making your spouse your primary and sole beneficiary for your IRA and use the Joint Life and Last Survivor Expectancy Table to find your RMD or you can use our RMD Calculator.

You can read more about this in “RMD Mistake: Not Using the Joint Divisor.”

Your primary beneficiary is someone or something else.

For individuals who are older than 70 1/2, the standard divisor is called the Uniform Divisor. You use the Uniform Lifetime Table to find your RMD or you can use our RMD Calculator.

You own an employer-sponsored retirement account, such as 401(k), 403(b), or 457(b) plan.

If you do not own the company, employer sponsored plans like 401(k), 403(b), and 457 plans are only subject to RMDs in the year you both reach age 70 1/2 and are terminated from your employment with the sponsoring employer.

However, if you are more than a 5% owner of the company that sponsors the plan, then you must start RMDs in the year you reach age 70 1/2 regardless of whether you are still employed.

Anyone who has to take RMDs from their employer sponsored retirement plan, sadly, has to take RMDs from all components of the plan. This includes traditional employee deferrals, profit sharing, employer match, and even Roth deferrals!

You can read more about this in “When to Get Your Money Out of Your 401(k), Especially Plan Owners.”

The RMD rules for employer-sponsored retirement accounts are otherwise the same as those for IRA accounts.

You inherited a retirement account from…

Your spouse.

When a spouse inherits retirement account assets, they have the right to do what is called a “Spousal Rollover” or “Spousal Transfer.” This is simply a transfer of ownership of the assets from the decedent to the spouse either via a rollover to a new account (the cleanest accounting) or by just treating the decedent’s IRA as though it were your own.

If you do the spousal rollover, that means you never need to take inherited RMDs but instead treat the assets as though they were your own, taking RMDs from the account per usual when you are over 70 1/2. This makes a huge difference. Read “RMD Mistake: Missing a Spousal Rollover” for more information on this.

Someone already taking RMDs.

If the original account owner had already had their required beginning date, then the IRA owner’s heirs have the option of taking RMDs according to the original IRA owner’s divisor if either there was no designated beneficiary or the original IRA owner was younger than the designation beneficiary.

Someone younger than their required beginning date.

If an IRA owner dies before turning 70 1/2 years old and is inherited by a non-spouse, then how the account was inherited and by whom determines how to calculate the RMD.

…via…

Probate.

If you inherit the IRA through probate (the reading of the Will), the decedent’s estate was not named as the designated beneficiary on the account, and the decedent died before his or her required beginning date, then the balance of the IRA must be distributed within 5 years of the decedent’s death. This rule applies even if a Trust inherited the account from probate and then you later inherited the account from that Trust instrument.

If the decedent died after his required beginning date, then you can take RMDs according to the original IRA owner’s divisor, as discussed above.

If the decedent’s estate was designated as a beneficiary, then in a Private Letter Ruling, the IRS set the precedent that even probate and the successive heirs named there can qualify for the beneficiary designation exception, described below.

If you cannot trace your inheritance back to a beneficiary designation and the original owner died before his required beginning date, then you must distribute all of the account within 5 years.

A beneficiary designation.

Non-spouse designated beneficiaries are permitted an exception to the 5-Year rule to use the Single Life Table to calculate their Inherited RMD divisor.

If the IRA is inherited into a trust, then in addition to the trust having to have been the designated beneficiary on the original IRA owner’s account, the trust needs to have a portion of the RMD distributed out of the trust to the beneficiary or beneficiaries in order to qualify.

Effectively, this means that the trustee needs complete annual distributions to the beneficiaries in order for the beneficiaries to qualify for the Single Life Table divisor.

Unlike Uniform or Joint divisors where you need to look up your new divisor on the table each year, the Single Life Table is used once in the year after the decedent dies. Then, in each successive year you subtract one from that fixed divisor to get the next year’s divisor. In this way, if your first divisor was 40.7, then you will distribute the entire account in 40 years.

You inherited an Inherited IRA.

When you inherit an inherited IRA from a non-spouse beneficiary of the original IRA owner, you are called a second generation inherited IRA beneficiary.

It doesn’t matter though whether you are the third, fourth, or even fifth IRA owner. The account may have gone from the original IRA owner to his spouse via a Spousal Rollover to her designated beneficiary and then to you. Or you may have inherited the account from the original IRA owner’s trust after the trust’s beneficiary’s death

Unfortunately, second generation beneficiaries do not have any special provisions for how to take their inherited RMD. However the first generation inherited IRA beneficiary took their RMD, you inherit that distribution schedule along with the account.

Often times, the first heir was able to qualify for the Single Life Table inherited RMD divisor as a designated beneficiary, which means that most of the time, you will inherit this fixed divisor. However, there are as many complexities in this situation as there are original inherited IRA complexities.

For more on this, read “What You Need to Know to Inherit an Inherited IRA.”

Photo by Daniel Lincoln on Unsplash

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Megan Russell has worked with Marotta Wealth Management since 2005. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine