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George F. Bearup, J.D. Senior Legal Trust Advisor

5-Dec-18

Revisiting the Required Minimum Distribution Rules

Take-Away: When an IRA custodian calculates the required minimum distribution for a married individual, it is always good idea to confirm which Table was used by the custodian to calculate that required minimum distribution (RMD) for the year and to know some of the tricks and traps of taking an RMD.

Background: It is important to have an individual’s required minimum distribution (RMD) accurately calculated each year. If the wrong RMD amount is calculated, and the RMD amount is more than what was actually reported and distributed, then the individual will owe a 50% excise tax on the RMD amount that was not taken before the end of the calendar year. If the amount taken as the RMD was more than what was required as the RMD for the calendar year, then the individual will have more taxable income to report and pay a tax on than they had to if the correct RMD was taken. Consequently, calculating the correct RMD amount is critical to avoid unnecessary income taxes or penalties.

Tables: Calculating the amount of an individual’s RMD requires using the correct IRS Table.

  • Uniform Life Table: Most IRA owners will use this Table. In actuality this Table is a joint life This Table presumes that the age of the IRA’s beneficiary is 10 years younger than the IRA owner. Example: Next year I turn 70 ½. I will have to take my RMD from my IRA. This Table provides me a factor of 27.4, which is the number that I will divide into my IRA balance determined on December 31, 2018. If I have an IRA balance on that date of $250,000, my RMD for 2019 will be $9,124.08 [$250,000 divided by 27.4 = $9,124.08.]
  • Joint Life Expectancy Table: This Table is used more rarely. This Table is used when the IRA owner’s spouse is more than 10 years younger. Example: If my wife is 11 years younger than me, using the same facts above, then the divisor under this Joint Life Table is 31.1. In this situation, my RMD for 2019 will be lower,  $8,038.58.
  • Single Life Table: This Table is used when an individual takes an RMD from an inherited IRA. The age of the designated beneficiary produces a life expectancy number, which becomes the divisor that is then divided into the December 31 value of the balance of the inherited IRA. Each calendar year thereafter that life expectancy divisor is reduced by 1.00.
  • Death: If the IRA owner dies during the calendar year an RMD must be taken, i.e. the IRA owner is over age 70 ½,  the Joint Life Expectancy Table (when the surviving spouse is much younger)  can be used for that year only; thereafter,  the surviving spouse must use the Uniform Life Table.
  • Divorce: If the IRA owner, over age 70 ½,  divorces during the year and he/she names another person as the beneficiary of the IRA, then the IRA owner must use the Uniform Life Table to calculate his/her RMD for the year, and all subsequent years. If the divorced IRA owner remarries an individual who is more than 10 years younger, then the IRA owner may go back to and use the Joint Life Expectancy Table to calculate his/her RMDs.

Age 70 ½ : The RMD obligation commences when the IRA owner turns 70 ½. Depending upon an individual’s birthdate, the first RMD can be delayed as much as up to 15 months.

  • Example #1: If I turn 70 years old in April, 2019, I will turn 70 ½ in October, 2019. Consequently, my first RMD must be taken by April 1, 2020, six months after I turned 70 ½.
  • Example #2: If I turned 70 years old in August 2019, then I will turn 70 ½ in February 2020. Thus, with my 70 ½ age determined early into the next calendar year, my first RMD would be on April 1 of the following calendar year when age 70 ½ was reached, or using this example, April 1, 2021.
  • Example #3: If my birthday is January 1; I turn 70 on January I, 2019.  I  will turn 70 ½ on July 1, 2019.  My first RMD must be taken by April 1, 2020, or 9 months after I turn age 70 ½. Contrast to if my 70th birthday is July 1, 2019. Because of that later birthdate in the calendar year, my age 70 ½ is January 1, 2020. Consequently,  my first RMD must be taken by April 1 of the year after I turn age 70 ½, or April 1, 2021; note that this first RMD will be roughly 15 months after I turned 70 ½.

Required Beginning Date: The first RMD must be taken by April 1 following the year when the IRA owner turns 70 ½. Note this is April 1, not to be confused with April 15 when a Form 1040 income tax return is normally due or the deadline to make a contribution to an IRA. Each year after the first RMD, the RMD must be taken by December 31. It is only the very first RMD that can be postponed until April 1 of the following calendar year.

Avoid ‘Bunching’ RMDs: Example: Since my birthday is in April, I will turn 70 years old in April, 2019, and consequently I will turn 70 ½ in mid-October, 2019. Therefore, my first RMD must be taken no later than April 1, 2020. But since I will have an RMD each year thereafter, if I postpone taking my first RMD until April 1, 2020, I will have a second RMD to take no later than December 31, 2020. That results in a ‘bunching’ of taxable income (i.e. two RMDs taken in one calendar year, 2020) arguably exposing that reported income to a higher marginal income tax bracket. Consequently, despite the opportunity to delay taking my first RMD until April 1 of the following calendar year, I am likely to take my first RMD prior to December 31, 2019 to avoid that ‘bunching of RMD income’ problem if I took two RMDs in one calendar year.

RMD on Owner’s Death: If the IRA owner is over the age 70 ½ and dies prior to taking his/her full RMD for that calendar year, then the decedent’s surviving spouse-beneficiary must take the balance of the decedent’s RMD. The balance of the RMD does not get reported by the decedent’s estate; rather, it goes to and is reported by the named beneficiary-spouse.

Spouse as Surviving Beneficiary: The surviving spouse who inherits a deceased spouse’s IRA has some choices, depending upon his/her age and cash flow needs. Example: Assume the husband dies prior to age 59 ½. The widow, if also under age 59 ½, should probably retain her late husband’s IRA as an inherited  IRA until she reaches age 59 ½ herself. If the widow were to immediately roll  her late husband’s IRA into her own IRA, and she later needed cash and pulled money from her rollover IRA, she would pay the 10% excise tax just for taking a distribution from her rollover IRA prior to attaining age 59 ½. If the widow left the IRA in husband’s name and she thus treated it as an inherited IRA, she could take funds from the inherited IRA without paying any 10% excise tax for an early withdrawal. Once the widow attains age 59 ½ the widow should then roll the funds from her late husband’s inherited IRA into her own rollover IRA. Once the funds are in the widow’s own rollover IRA, she will not have to take any RMD’s based on what was formerly her late husband’s inherited IRA until she turns age 70 ½ and starts to take her own RMDs. Thus this decision by a surviving spouse depends upon his/her age and his/her probable need to access the IRA to meet the survivor’s financial needs.

Qualified Charitable Contribution: To repeat what has been previously stressed in earlier missives, a qualified charitable contribution is a great opportunity for a traditional IRA owner who is over the age 70 ½, who can make direct charitable contributions from his/her traditional IRA to charities and have those distributions  from the IRA satisfy the IRA owner’s RMD obligation for that calendar year. These qualified charitable distributions are not tax deductible, but the distributions are not reported as taxable income by the traditional IRA owner. The effect is that the qualified charitable distribution will not be reported as income and the traditional IRA owner can still claim the now- higher standard deduction on his/her Form 1040 income tax return. In short, the qualified charitable distribution is treated as if it was 100% income tax deductible, which is critical when you consider that most taxpayers will no longer itemize their income tax deductions for the calendar year due to the much higher standard deduction amount under the 2017 Tax Act.

  • Timing Caution: The first dollars that come out of the traditional IRA by its owner will be treated as RMDs for that calendar year, assuming the IRA owner is then over age 70 ½ and  faced with a RMD. If a traditional IRA owner, over the age 70 ½, has an RMD for the calendar year of $12,000, and he/she withdraws $7,000 early in that calendar year, and that IRA owner later wants to make qualified charitable contributions for the same calendar year from that IRA, that owner can only make $5,000  in qualified charitable contributions using their IRA, since they already took $7,000 in RMD distributions earlier in the same calendar year. Example: I turn 70 years of age in April 2019. I thus am eligible to make a qualified charitable contribution after October 2019 when I am then age 70 ½. While I can take RMDs from my IRA at any time during 2019 (knowing that I want to take my first RMD in 2019 to avoid the ‘bunching’ of that first RMD with my second RMD  if I postpone taking the RMD until April 1, 2020) if I access my traditional IRA with distributions early in 2019, I will limit my ability to make qualified charitable contributions by taking any RMD distributions from my traditional IRA early in 2019. Consequently, if I plan to use my traditional IRA to make qualified charitable contributions and thus gain the effect of a 100% income tax charitable deduction for 2019 (and still use the standard deduction for 2019), I will defer taking any IRA distributions until after I turn age 70 ½, i.e. in October 2019. I will then do my charitable giving after I attain that age 70 ½ and direct the IRA custodian to make my qualified charitable contributions. I will then take the balance of my 2019 RMD (if any remains to be taken) prior to December 31, 2019.

Conclusion: No one ever said the RMD rules were easy to understand. But a working knowledge of them is critical when you advise a client with a large traditional IRAs, or when you work with a surviving spouse to advise them as to their options when they are named as the beneficiary of their deceased spouse’s IRA, or when an IRA owner, over the age 70 ½ is charitable inclined.