HOW ARE RMDS CALCULATED?
- Posted by Richard Winters, CFP®, CRPC®
- On March 16, 2020
- financial future, RMD
RMDs, or Required Minimum Distributions, are calculated by dividing your traditional IRA or retirement plan account balance by a life expectancy factor specified in either the Uniform Lifetime Table or the Single Lifetime Table. Your account balance is usually calculated as of December 31 of the previous year. You are allowed to defer your first RMD (the year you turn 72) until April 1st of the following year. If you decide to defer your first RMD, you will be required to take two RMD’s in that following year.
Example(s): You have a traditional IRA. Your 72nd birthday is November 1st of 2020. You can take your first RMD by December 31st, 2020 or you can wait to take your first RMD until 2021. However, the first RMD must be withdrawn by April 1st, 2021. You will then need to take a second RMD by December 31, 2021 of that same year.
For most taxpayers, calculating RMDs is straightforward. For each calendar year, simply divide your account balance as of December 31 of the prior calendar year by your distribution period, determined under the Uniform Lifetime Table using your attained age in that calendar year. This life expectancy table is based on the assumption that you have designated a beneficiary who is exactly 10 years younger than you are. Every IRA owner’s and plan participant’s calculation is based on the same assumption.
There is one exception to the procedure described above – the younger spouse rule. If your sole designated beneficiary is your spouse, and he or she is more than 10 years younger than you, the calculation of your RMDs may be based on the longer joint and survivor life expectancy of you and your spouse. (The life expectancy factors can also be found in IRS publication 590.) Consequently, if your spouse is your designated beneficiary and is more than 10 years younger than you, you can take your RMDs over a longer payout period than under the Uniform Lifetime Table. If your beneficiary is not your spouse or a spouse who is not more than 10 years younger than you, then you must use the shorter payout period specified in the Uniform Lifetime Table.
The following Uniform Lifetime Table applies to:
- Unmarried owners
- Married owners whose spouse is not more than 10 years younger
- Married owners whose spouse is not the sole beneficiary
Tip: In order for the younger spouse rule to apply, your spouse must be your sole beneficiary for the entire distribution year. Your spouse will be considered your sole beneficiary for the entire year if he or she is your sole beneficiary on January 1 of the year, and you don’t change your beneficiary during the year.
In other words, even if your spouse dies, or you get divorced after January 1, you can use the younger spouse rule for that distribution year (but not for distribution years that follow). In the case of divorce, however, if you designate a new beneficiary prior to the end of the distribution year, you cannot use the younger spouse rule (since your former spouse will not be considered your sole beneficiary for the entire year).
If you have multiple IRAs, an RMD is calculated separately for each IRA. However, you can withdraw the required amount from any one or more IRAs. Inherited IRAs are not included with your own for this purpose. If you participate in more than one employer retirement plan, your RMD is calculated separately for each plan and must be paid from that plan.
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