IRS Required Minimum Distribution Explanation

The next several guest blog posts are from my Dad who retired many years ago and wrote several articles to assist me in writing my book, The Financial Guide to Life.  First up is an explanation of the IRS’s Required Minimum Distribution rules for withdrawing money from your tax-deferred retirement savings accounts.  Then we will use this background for a deeper discussion of withdrawal strategies.  Follow along with the tables in IRS Publication 590-B, especially the Appendices.

Required Minimum Distribution

The IRS Required Minimum Distribution (RMD) rules, which apply only to tax deferred defined contribution plans such as 401(k)s, 403(b)s, 457(b)s and traditional, SEP, and SIMPLE IRAs, are based on life expectancy tables, amount of savings, and current market value, and were primarily designed by the IRS to recoup deferred taxes.   Although these rules are mandatory for retirement account owners over age 70 ½, they also apply to spouses of any age, and if your retirement account beneficiary is a non-spouse, can apply to beneficiaries younger than 1 year of age!  Failure to comply with these guidelines can result in penalties ranging from 10% for early distributions before age 59 ½, to 50% on shortfall amounts not meeting the Minimum Distribution Requirement.  The RMD minimum withdrawal rules apply regardless of any withdrawal method (4% rule, etc.) selected by you.  Therefore, if you are the owner of a tax deferred retirement account, it is imperative that you understand the RMD rules and the distribution guidelines (a) before retirement, (b) before selecting your retirement account beneficiaries, (c) before selecting your distribution methodology, and (d) before taking any annual distribution.

RMD guidelines are contained in IRS Publication 590-B Individual Retirement Arrangements.

  • Table III (Uniform Lifetime) applies to unmarried owners, married owners whose spouses are not more than 10 years younger than the retirement account owner, and married owners whose spouses are not the sole beneficiary of their IRAs.  Although this table begins at age 70, it can be accurately extended to ages below 70 (see below).
  • Table II (Joint Life and Last Survivor Expectancy) applies to owners whose spouses are more than 10 years younger and are the sole beneficiary of their IRAs.  Table II is a cross reference between the account owner’s age and the spouse’s age.  The intersection of the two ages in Table II is the life expectancy factor to be used for that years distribution (i.e., owner aged 70, spouse aged 60; the factor is 27.4).
  • Table 1 (Single Life Expectancy) applies to all beneficiaries who are not sole-beneficiary spouses.  Note that this table begins with a Life Expectancy of 0 years old.
  • Note the relationship between Tables II and III.  The Table II intersection of owner age 70 and spouse age 60 (factor=27.4) is the same as Table III age 70 (factor=27.4).  Likewise, the table II intersection of owner age 71 and spouse age 61 (factor =26.5) is the same as table III age 71 (factor =26.5).  Therefore, if you wish to use an “RMD” methodology at an age below 70, simply go to Table II and select an intersection with an age 10 years younger than your retirement age.  Retirees of any age (married or unmarried) can use this strategy by dividing their total year-end retirement savings balance by the relevant life-expectancy factor from IRS table II or III.
  • Note also that Tables II and III (spouse 10 years younger than owner) have identical distribution periods until owner age 115. After age 115, owners using table III (unmarried or spouse not more than 10 years younger) will have an annual 1.9  (52.63%) distribution period until full depletion, while owners using table II (spouse more than 10 years younger than owner) will continue to follow prescribed distribution periods until the distribution period reaches 1.0 (100%).  

Next time, we will compare this to the 4% rule.

About John Kimball

Over the past few decades, I have experienced most of these financial issues with both mistakes and successes. I sure wish someone had told me these things when I was first starting out. So many times I have cried out, "I want a do over!" when I learned a new financial lesson or tip. I aim to pass along to you the financial insights I have gained from experience, reading, analysis, and living the financial aspects of managing, saving, investing, and spending your money. I am an analyst with a large organization and happily married with two children on their way to an expensive college, no doubt. I read numerous financial blogs, websites, newsletters, magazines, newspapers, and books to bring you the latest news, insights, tips, and lessons combined with decades of experience.

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