Article Archive

Required Minimum Distribution Revisted

Required Minimum Distributions (RMD) references the amount a person has to take out of their retirement plan each year when they reach age 70-½. I guess the government decided that the benefit of having your investment assets grow on a tax-deferred basis was a nice perk, but they also wanted a point in time when they would begin to receive some of their deferred tax revenue back into government coffers. This RMD rule does not apply to a Roth IRA.

In the aftermath of the 2008 recession that continued into 2009, the government allowed for a suspension of RMD withdrawals for the 2009 calendar year. This meant that if you had just become 70-½ you were not required to take the initial distribution, and for those that were over age 70-½ and already taking distributions, you could suspend those withdrawals for 2009. I imagine one part of the thinking behind this suspension was a concern that the market decline had already reduced the asset pool from which each person had to take distributions, and that additional withdrawals on top of the market decline might put the long-term viability of a retirement account in jeopardy. If you opted to not take withdrawals in 2009, it is useful to remember that you must take the currently calculated distribution for 2010. However, you do not have to add the suspended 2009 amount to the 2010 RMD.

The RMD for a given year is a minimum amount based on a calculation using a table that reflects life expectancy and the value of your retirement investment account at the previous year end. You divide the previous year’s 12/31 account value by this age-based life expectancy factor to determine the amount that must be distributed in the calendar year. This is merely the minimum required distribution and larger amounts can be taken if desired.

Given the amount that you take as an RMD is taxable income, it is useful to work with your accountant to determine how much withholding you should apply to this distribution. In most situations I advise having tax withheld on your distribution so that you don’t have to figure out where to come up with the tax money when the filing deadline comes around the following year. If you are disciplined and put the money away for taxes yourself, it can work, but I’ve had enough situations where clients have forgotten to save the money and end up scrambling to find the tax payment to warrant the recommendation to have taxes withheld.

An RMD distribution can be taken as a lump sum or spread over a series of installments. If the account is invested in stocks or bonds and therefore subject to fluctuation, averaging your annual RMD out over a 12-month period eliminates the possibility that the entire amount is taken at the lowest point of the year for the market, thereby depleting the account to a greater extent than might be desired. Some of our clients, who do not need RMD withdrawals for daily living expenses, transfer the RMD in one lump sum into their personal investment account and then tap the account if some unanticipated expenditure arises. In this case there is no need to take the distribution on a monthly basis to minimize the impact of undesirable timing, as the money remains invested and it is only the value of the respective accounts that is altered. This practice removes the concern for inadvertently withdrawing all of the money at a low point in the market.

Jerry Mosher, CFP® is a 30 year veteran of the financial planning industry and is president of Mosher & Ellis Financial Planning in Lafayette, California. He has been selected three times as one of the 150 best financial advisers for doctors by Medical Economics.Jerry may be reached at (925) 284-9470.  Securities offered through AMERICAN INVESTORS COMPANY Member NASD/SIPC.