Qualified Retirement Plans

What are Minimum Required Distributions?

Beginning in the calendar year following the year in which you reach age 70½, the IRS generally requires you to withdraw a minimum amount of money from your tax-advantaged retirement accounts each year; only Roth IRAs are exempt during the account owner's lifetime. This amount is called a Minimum Required Distribution, or MRD. Note that you can always take more than the MRD amount from your IRAs.

You are generally required to take MRDs from any retirement accounts into which you contributed tax-deferred assets or in which you have tax-deferred earnings. These accounts include Traditional IRAs, Rollover IRAs, SIMPLE IRAs, Keoghs, and SEP-IRAs, as well as most 401(k) and 403(b) plans.   Roth IRAs are the exception - you are not required to take MRDs from a Roth IRA during your lifetime and you cannot satisfy your MRD requirement with a withdrawal from a Roth IRA.

Calculating your MRD

Generally, your MRD is determined by dividing the adjusted market value of your tax-deferred retirement account as of December 31 of the prior year, by an applicable life expectancy factor taken from the Uniform Distribution Table.

The December 31 market value of each of your retirement accounts should be adjusted for any pending year end transfers or rollovers. For example, if assets were withdrawn from an IRA or qualified employer-sponsored plan within the last 60 days the prior calendar year, and then a portion or all of the assets were rolled over to an IRA this year, you must add the amount of the rollover to the balance of your IRA as of December 31 of the prior year. This may also apply to year-end transfers not credited to your account until after December 31, unless the MRD attributable to the amount transferred was distributed from the transferring account prior to the transfer.

If your spouse is more than ten years younger than you, and he or she will be the sole primary beneficiary for the entire distribution year, you should use the Joint Life Expectancy Table to calculate your MRD. This will result in a smaller MRD than with the Uniform Distribution Table.

In January 2001, the IRS proposed the revised rules described above. As a result, it is no longer necessary to make elections for life expectancy or calculation method as under the old rules. In addition, you no longer have to name a beneficiary before you begin taking MRDs. In fact, you can now designate a beneficiary or change a designation after you reach age 70½ without affecting your MRD calculation in most cases. However, it is always a good idea to keep beneficiaries up to date. These rule changes may also help your beneficiaries stretch their MRDs.

The IRS has stated that IRA owners can use either the old rules or the new rules to calculate MRDs for 2001 only. However, for almost all IRA owners, the new rules will result in a smaller required annual distribution, however, there are a limited number of instances where the new rules may not be beneficial.

Please note that qualified plan participants, including Keogh plan participants, may not utilize the new MRD calculation methods until their plan has been amended to allow the use of the new MRD rules.

If you have more than one IRA, each year the MRD must be calculated separately for each IRA. However, you may aggregate your MRD amounts for all of your IRAs and withdraw the total from any one or more IRA, or you may withdraw a portion from each of your IRAs. If you have qualified plan accounts in addition to your IRAs, you must calculate and satisfy your MRDs for IRAs separately from your qualified plan accounts.

If you have more than one qualified retirement plan account, you must calculate and satisfy your MRD requirements separately for each qualified plan account. For example, if you have both a Profit Sharing Plan and a Money Purchase Plan, you must separately calculate and withdraw an MRD from each plan.

Deadlines
You may withdraw your annual MRD in one lump sum or make withdrawals periodically throughout the year, but the total annual minimum amount must be withdrawn by the deadline of December 31 each year (except for your first MRD as explained below).

Penalties
The penalty for taking less than your minimum required distribution can be severe. If you withdraw less than the minimum required amount, the IRS may assess a penalty equal to 50% of the amount of the MRD not taken.

Taking your first MRD
For the first MRD, you generally have until April 1 of the year following the calendar year you turn 70½ to take your first annual MRD. This is known as your Required Beginning Date, or RBD. In subsequent years, the deadline is December 31.

Timing and Taxes for the first MRD
If you take your first MRD between January 1 and April 1 of the year after you turn 70½, you still need to take your second MRD by December 31of the same year. Since IRA and Keogh distributions are taxed as ordinary income, this may push you into a higher tax bracket. Plan your first withdrawal carefully.

If you are a Keogh participant who is still working …
If you continue to work beyond age 70½, and do not own more than 5% of the business you work for, you may be able to defer taking distributions from the company's Keogh plan until April 1 of the calendar year after the calendar year you retire. You must still calculate and take an annual MRD for other tax-deferred retirement accounts each year after you turn age 70½.

Beneficiaries and "stretching of assets
Although the importance of your beneficiary in your lifetime MRD calculations has been reduced significantly, it is still important to have designated beneficiaries for your accounts.

The 2001 IRS proposed rules have created new planning opportunities for stretching out the tax-deferral of IRA assets after the death of the original account owner. With proper planning, and through the use of strategies such as distribution, disclaimers and separation of beneficiary assets, many beneficiaries can minimize their required distributions and potentially maximize the advantages of tax deferral. However, these post-mortem steps must be taken and completed no later than the end of the calendar year following the year of death.

Post-mortem options for designated beneficiaries

If multiple beneficiaries of disparate ages exist and the assets are separated into an individual account for each beneficiary, then in certain cases each designated beneficiary may use his or her own life expectancy to determine MRDs after the account owner's death.

If multiple beneficiaries of disparate ages exist, an older beneficiary may choose to disclaim their inheritance. In this case, if the assets are disclaimed by the end of the calendar year following the year of death, the disclaimed assets could pass to a younger beneficiary, thus allowing that individual to stretch the assets over a longer MRD payout.

If multiple beneficiaries exist and one is a charitable organization, the charitable assets can be paid out by the end of the calendar year following the year of death and the remaining beneficiaries can potentially calculate each of their MRDs over their own life expectancy.

Post-mortem options if there is not a designated beneficiary

If the account owner dies before his or her Required Beginning Date (generally April 1 of the year following the calendar year the account holder turns 70½), generally the account balance must be distributed within five years of the owner's death.

If the account owner dies after his or her Required Beginning Date (generally April 1 of the year following the calendar year the account holder turns 70½), future MRDs are paid out by using the deceased account holder's remaining single life expectancy, using his or her age as of his or her birthday in the calendar year of death, reducing life expectancy by one for each year elapsed since the year of death.

If your beneficiary is your spouse
Under a special rule applicable to IRAs only, if your spouse is your sole primary beneficiary with unlimited right to withdraw, upon your death he or she may choose to treat any remaining assets in your account as his or her own and may roll them over into an IRA in his or her own name. This allows a surviving spouse who is not yet age 70½ to defer withdrawing assets until he or she reaches the Required Beginning Date for MRDs.

Please note that if your spouse is the beneficiary of your IRA assets by virtue of a being the beneficiary of an IRS qualifying Look-Through Trust (in other words, the Trust is your beneficiary on the IRA and your spouse is the beneficiary of the Trust), then he or she will not have the option to roll the assets over to an account in his or her own name following your death.

Uniform Distribution Table

To calculate your MRD under the new proposed regulations, use the following formula for each account:

Account Balance as of December 31 of the prior year (adjusted, if necessary, for any rollovers or transfer in process on December 31 of the prior year) / Factor from New Uniform Distribution Table* (use the divisor that corresponds to the age the account owner attained this year)

*Effective January 1, 2001, the New Uniform Distribution Table can be used by all IRA owners, unless their sole beneficiary for the entire year is their spouse who is more than 10 years younger. In that case, the regular Joint Life Expectancy Table is used, which could reduce the MRD even further. Please Note: If you are taking MRDs from an inherited IRA, the formula above and the example and table below are not applicable.

Example:

Account balance as of December 31, 2000: $100,000

IRA owner's attained age in 2001: 72

2001 MRD = $100,000 / 24.4 = $4,098.36

Please Note The MRD Tables are intended to serve as an informational tools only, and should not be construed as legal, investment or tax advice. Please consult with our office about your unique circumstances.

Uniform Distribution Table

Joint Life Expectancy Distribution Table

Instead of the above Uniform Distribution Table, you may be required to calculate your MRD under the new proposed regulations using the Joint Life Expectancy Table.

Just close this window to return to the Estate Planning Page.