The Return of the Required Minimum Distribution

Because of the economic downturn in late 2008, the federal government allowed taxpayers to skip required minimum distributions from their IRAs and qualified retirement plans for 2009 only.  The purpose of the suspension was to avoid forcing taxpayers to sell stock while at its weakest if the taxpayer didn’t need the money.  As we move into the New Year, don’t forget that these required distributions are now back in place.

Required Minimum Distributions (RMDs) are payments that must be made from IRAs and employer-provided defined contribution retirement plans [401(k) plans, etc.] generally by April 1 of the year following the calendar year in which the taxpayer reaches age 70 and a half.  This minimum amount to be distributed is determined by dividing the account balance of the IRA on December 31 of the previous year by a certain number of years provided in IRS tables based on your current age.  For example, if the appropriate table has a distribution period of 22.9 years, and your IRA balance was $300,000 on December 31 of the previous year, your current RMD is $300,000 / 22.9 years = $13,101.  Failure to take the required amount out of your IRA will result in a 50% penalty tax.

If you had already been taking RMDs prior to 2009, you just pick back up where you left off for 2010, using the IRS tables to determine the appropriate distribution period based on the IRA value at December 31, 2009.  2010 distributions are required to be withdrawn by December 31, 2010.

If you reached age 70 and a half in 2009, your RMD for 2009 would normally have to be taken by April 1, 2010.  However, due to the suspension, no RMD was required for 2009.  Therefore, you make your first RMD by December 31, 2010, for the 2010 calendar year.

If you will reach age 70 and a half in 2010, you have until April 1, 2011 to take your first RMD, which counts as the distribution for calendar year 2010.  You may of course take the distribution earlier.  After this first year, future distributions are required to be made by December 31 each year, so your 2011 RMD must be made by December 31, 2011.

In most cases, the company that manages your retirement account can calculate the RMD and ensure that it is distributed each year.  Just make sure they know your date of birth and they will take it from there.  If you have more detailed questions, you should consult a tax advisor.