Required Minimum Distribution Method

What is Required Minimum Distribution?

The Required minimum distribution method is a simple way of calculating substantially equal periodic payments and is one that resets every year.  It is basically calculated by dividing your retirement account balance by your life expectancy factor as provided by the IRS grid

You will have three choices for a life expectancy factor.  You can either go with single life expectancy(no beneficiary), joint life expectancy, or the Uniform Lifetime table.  The latter two assume a beneficiary.  Remember, the longer you expect to have to pay benefits, the smaller your payments will be. 

How do I calculate the payment?

First you need to determine what your account balance is.  The IRS does not provide guidelines on this except by saying that the balance must be determined in a reasonable manner.  The most prudent thing to do here would be to use the balance of your account from the end of the prior tax year. 

Now that you have your balance, you will divide this by the life expectancy factor that you derived from one of the three life expectancy tables we mentioned above.  This is the amount you will receive in the first year.

This process must be repeated every year and be sure to only distribute the exact amount that you calculated.

Advantages of using Required Minimum Distributions Methodology

Being that you will be receiving an adjusted amount every year, this method allows you to actually withdraw an amount which takes into account your gains/losses from the prior year. 

Disadvantages of using Required Minimum Distributions Methodology

The drawback to using this method is probably obvious to you now.  Your distributions could swing drastically up and down as your investments fluctuate.  If you are looking for stable payments every year, this may not be the best option.  The nature of the life expectancy table renders smaller payments upfront and larger payments as you approach retirement.  This could be troubling for some of you as well. 

It is a big step to decide which form of computation you will be using to determing periodic payments; it is advisable to seek the help of a professional before you make the final move.

Miscellaneous Rules

Just a few other rules to know about when it comes to required minimum distributions.

  • Instead of taking a yearly distribution, it is acceptable to take more regular withdrawals, such as monthly or quarterly as long as long as the distributions meet the required amount.
  • If you have multiple IRA's in which you wish to take money from, you essentially are allowed to withdraw more money.  The IRS rule allows you to withdraw the total allowable aggegate amount from a single IRA.  For example, assume you can take $10,000 from three different IRA's, for a total of $30,000.  Essentially, you will be allowed to take $30,000 from a single IRA if you would prefer.
  •  Individuals who withdraw more than the required minimum distribution for the year cannot use the excess as a credit fro the following year.  For example, if your required minimum distribution for last year was $2,000 and you withdrew $3,000; you must reduce your IRA balance from which you calculate RMD upon by $3,000. 

Tim Ord
Ord Oracle

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