by: Denise Appleby, CISP, CRC, CRPS, CRSP, APA
Calculating your required minimum distribution (RMD) amount might seem like a simple process. Consider for instance that in most cases, determining your RMD for this year will entail dividing your fair market value (FMV) for December 31 of last year by your distribution period ( applicable life expectancy) for this year. However, determining your FMV is not is not as simple as looking at your account statement or FMV report from your IRA custodian, and determining your distribution period can be a little complicated. Let’s talk about some of the things you must do to ensure that your RMD calculation is accurate.
Determining Your FMV
If you participate in a qualified plan
, it may be best to leave the determination of your FMV and your RMD calculation to your plan administrator
. While some qualified plans will use the value of your account as at December 31 to determine your FMV, others utilize the ‘most recent’ (FMV) value available before December 31, because they do not perform a valuation of your account on a daily basis. Notwithstanding, it is good practice to double check your calculation.
custodian must either proactively provide you with a calculation of your RMD amount, or send you an offer to calculate it upon your request, providing they held your account as at December 31 of the previous year. However, they are not responsible for determining if adjustments should be made to your FMV, which means you must make that determination. The following are some additions that you must make to your FMV for December 31 of last year, for purposes of calculating your RMD for this year.
- Outstanding Recharacterizations: If you completed a Roth conversion last year and recharacterized all or a part of it this year, the recharacterized amount must be added to your FMV for December 31 of last year
- Outstanding rollovers:If you took a distribution from your IRA and rolled over the amount within 60-days, but the distribution occurred last year and the rollover occurred this year, the rollover contribution amount must be added to your FMV for December 31 of last year
- Outstanding transfers: If you started a trustee-to-trustee transfer between IRAs and the assets left your IRA before close of business on December 31 and were credited to your receiving IRA after December 31, the transferred amount must be added to your FMV for December 31
Your IRA custodian is not responsible for making these adjustments. If these adjustments are not made to your FMV, your calculated RMD amount will be less than it should be, and could result in you owing the IRS an excess accumulation penalty of 50% of the shortfall.
Determining Your Distribution Period
Retirement Account Owners
Your distribution period, also referred to as your life-expectancy
, is determined by your age as of the end of the year for which your RMD calculation is being done and the IRS Table that you must use. For purposes of calculating your RMD, you are required to use the Uniform Lifetime Table
, unless your spouse is your sole primary beneficiary and is more than ten years your junior, in which case you would use the Joint Life Expectancy Table
. The Uniform table assumes that your beneficiary is ten years your junior. For instance, if you are age 72 as of December 31 of this year, your distribution or life expectancy period would be 25.6, and in order to determine your RMD for this year, you would divide your FMV for December 31 of last year by 25.6.
Unlike RMD amounts for IRA owners, custodians are not required to calculate RMD amounts for inherited IRAs
. As such, you may be required to calculate your RMD for your inherited IRA. If such is the case, it may be wise to work with your tax or retirement planning professional to ensure the accuracy of the calculation. The following are some tips on calculating RMD amounts for your inherited retirement account.
- If the retirement account owner died before his or her required beginning date (RBD): In this case, you would need to determine if you are subject to the five year rule or the life expectancy rule. You are subject to the five year rule if the document or agreement governing the retirement account provides only the five-year rule as a distribution option for beneficiaries, or if the five year rule is the default and you did not ‘opt out’ and choose the life expectancy option.
- Under the five year rule, distributions are optional until December 31 of the 5th year that follows the year the retirement account owner died. For instance, if the retirement account owner died in 2008, the account balance must be complete distributed by December 31, 2013. Note: Under the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), the five year period is extended for one year, if one of the five years includes 2009. As such, the deadline would be December 31, 2014 in the example used in this paragraph. For details on this provision, see the article Waiver of Required Minimum Distribution for 2009
- Under the life expectancy option, your life expectancy is the period that corresponds with your age on the single life expectancy table. Your first life expectancy is determined the year that follows the year that the retirement account owner dies, and one is subtracted for each subsequent year. For instance, if the retirement account owed died last year and you reach age 50 this year, your life expectancy would be 34.2. For next year it would be 33.2, the following year it would be 32.2 and so on.
- If the retirement account owed died on or after the RBD: If the retirement account owner died on or after his/her RBD, your RMD amounts are required to be distributed over the longer of :
- The remaining life expectancy of the retirement account owner ,or
- Your life expectancy
If the retirement account owner’s life expectancy is used, it is determined in the year he/she dies and one is subtracted for each subsequent year. If your life expectancy is used, it is determined in the year that follows the year the retirement account owner dies and one is subtracted for each subsequent year.
Calculating The RMD Amount
Your RMD is calculated by dividing the previous year’s FMV by your life expectancy. As such, if your life expectancy is used and you are age 50 this year, your RMD for this year would be determined by dividing the account’s FMV for December 31 of last year by 34.2. If you are subject to the five year rule, you do not have an RMD until the fifth year, in which case the RMD is the entire account balance and must be distributed by December 31 of that year. For more on the RMD rules, see the article Meet Your RMD Deadline or You Will Owe the IRS Penalties!
If you fail to withdraw your RMD amount, your will owe the IRS an excess accumulation penalty of 50% of the shortfall. As a result, it makes good financial sense to double check your RMD calculation to ensure it’s accuracy. If you find that your distribution is more than your RMD amount, you can rollover the amount in excess of the RMD. However this must be done within 60-days of you receiving the distribution. It must be noted that distributions taken from an inherited account are not rollover eligible; for more on this see the FAQ: Can I Rollover My Inherited IRA
. Note also that instead of manually performing your RMD calculation, you may use the RMD calculator at www.72t.net.