What does RMD stand for? Remote Modulated Diactoids? No, it stands for Required Minimum Distribution. Still, you may ask, what is a Required Minimum Distribution? Required Minimum Distribution is a term that applies to your IRA, your Individual Retirement Account. But not to just any IRA. It does not apply to your Roth IRA, just your Traditional IRA. But what does it mean? Well, put quite simply, it is the minimum amount that you are required to withdraw from your Traditional IRA when you reach the time of retirement, or the maximum age of 70 ½ years old.
The Required Minimum Distribution
So this is how the Required Minimum Distribution works… If you own a Traditional IRA, when you reach the age of retirement, or the maximum age of 70 ½, you will be required to begin taking out money. Why not with your Roth IRA? Because when you go to withdraw money from your Roth IRA, that money is tax free. The IRS really isn’t concerned with that money any more. They already got their taxes when you went to contribute the money. But the exact opposite is true with your Traditional IRA. With your traditional IRA you got the tax benefits when you first contributed the money. When you go to withdraw that money, that’s when you pay the taxes, that’s when the IRS gets their cut. And they want their cut. That’s why they place this Required Minimum Distribution on you. They want to know that you are indeed going to start withdrawing your money, and that they are going to get their taxes.
Required Minimum Distribution regulations
There are regulations involved when withdrawing your money from your Traditional IRA. The IRS has an RMD calculator that helps you figure out what your Required Minimum Distribution is going to be. Let’s say for an example you have $100,000 in your Traditional IRA account when you turn 70 ½ years of age. You are now required to start drawing money out of that account. But how much? How much is the minimum?
The way the IRS calculates the Required Minimum Distribution is a combination of how much is in your Traditional IRA account by how many years they expect you to live, your life expectancy. For example: If you have that $100,000 in your account, and at age 67 the IRS projects you will live another 27 years (from age 65), then at an estimated rate of 6% return your Required Minimum Distribution will be $3650.00 per year.
Note: While there are no Required Minimum Distributions for your Roth IRA, there is in fact an after-death distribution. After you pass on, it is required that the funds in your Roth IRA start being withdrawn.
RMD Regulations 2002, final RMD regulations
In 2002 the IRS published its final RMD regulations, looking to make permanent the Required Minimum Distributions and their regulations. These final regulations were received well. Final regulations included:
New Life Expectancy Tables: From calendar year 2003 on, new life-expectancy tables are to be used when calculating all RMDs. For example, this new table calculates the life expectancy of someone 70 years of age to be 27.4 years. This new life expectancy level was increased from the previous table, which calculated the life expectancy at 17 years. This means to you, less money for your RMD every year, for a longer period of time. You can still withdraw more money if you wish. Remember, this is just the minimum. Again, with more people keeping more of their money in their accounts, that means more money will stay in the markets, T-bills, even in the banks. The minimum is optional, of course.
Beneficiary Determination Deadline Change: In response to popular demand, the IRS in 2002 changed the deadline for naming a beneficiary from December 31 of that year to September 30 of the following year. This allows more time to calculate the RMD.
RMD Reporting Requirements Deferred & Modified: Custodians and trustees as of the year 2004 will be happy to know that they must alert the IRS that the owner will be taking his or her RMD, but do not have to specify the amount.
Calculations Simplified: As of fiscal year 2003, RMDs activated on April 1 of any year no longer must be deducted from the balance of the previous year. As well, RMDs activated after January 1 no longer have to be added back either.
Simplification of the rules as of 2002
The changes in 2002 were made to help simplify the RMD process. Under these new rules, life expectancy is now determined by just one single table. On this new table, as it applies to beneficiaries, it is now assumed that the beneficiary is ten years younger than the owner of the IRA account. The only exception to this rule is when the beneficiary, such as a spouse, is actually more than ten years younger than the owner.
How these rules work
Let’s say for example that Joe has just reached age 70 ½. Joe has named his wife, Joline, as his beneficiary. Joline is 64 years old. The life expectancy is calculated by taking both the ages 70 and 60 (ten years younger) and combining them This gives you a life expectancy number of 26.2. Remember, because there is a beneficiary, that means the policy still goes on as if the owner is still alive, so the calculation must figure in the beneficiary as well. More simply put, if the life expectancy age was only calculated for Joe, and if he lived exactly to that calculation, then what would happen to Joline? All the benefits would have run out, and Joline, who might live ten, twenty years more, would be left with nothing. This combination of the ages is used so that the fund will still be there for the beneficiary as well.
The 2002 changes in regard to adding a beneficiary
What even if Joline were to outlive the benefits? What if Joline dies just a year after Joe, or with God’s help the benefits are so great that they simply outlive her? Can Joline pass on the remaining benefits? The answer is, yes.
The way Joline, as the beneficiary, can pass on the remaining proceeds of Joe’s IRA, maybe to her kids or grandkids, is to “disclaim” all or part of the IRA. This means in essence that Joline would have to forego the remaining portion of Joe’s IRA, opting instead to pass it along by disclaiming herself as the beneficiary. Before the 2002 regulations changes, the primary beneficiary of an IRA was not allowed to pass on the proceeds to another beneficiary.
Suspension of RMD rules
In December 2008 Congress passed legislations that suspended the Required Minimum Distributions for the calendar year 2009. This was in response to the financial crisis of 2008, in essence to help keep money in the system, still invested in things like the stock market to help keep market levels up, and even such things as T-bills to help keep the government solvent and even bank CDs to help them get through the crisis too. It wasn’t that you couldn’t being withdrawing your money, Congress just decided that if they passed the legislation some people would want to take advantage of the furthering tax benefits. The Required Minimum Distribution was returned to its current state for the year 2010 and on.