Upon attainment of age 70 ½ , individuals who own retirement accounts, except Roth IRA, must begin a series of annual withdrawals known as required minimum distributions (RMDs). RMDs must be taken annually by December 31. A grace period is extended to the first RMD: so long as is completed by is April 1 of the following calendar year, it is deemed timely. The second RMD is taken in the same year, so the account holder ends up taking two required withdrawals in year two: one to satisfy the prior year’s RMD and the second to fulfill the current year’s requirement.
For example, John was born on August 1, 1943. He turned 70.5 on February 1, 2014. John’s RBD, the date by which he must receive his RMD, is April 1, 2015. The amount of this RMD is based on the account balance as of 12/31/2013. All of John’s future RMDs must be withdrawn by 12/31 of each year.
But how is the account value for the 2015 RMD determined: specifically, is 12/31/2014 the account balance reduced by the RMD amount taken after 12/31/2014 to satisfy the 2014 minimum withdrawal requirement? The answer is no. To calculate the 2015 required minimum distribution, you would take the actual market value of the account on 12/31/14 without regard to the RMD taken by April 1, 2015 to satisfy the first year requirement.
Let’s build on our earlier example: As of December 31, 2013, John’s IRA account balance was $265,000. To determine the RMD, we divide the account value by a factor from the IRS Uniform Lifetime Table. The factor is based on the highest age the individual will attain in the calendar year for which the distribution is being made, in our case it is 2014. In 2014 John will be 71, therefore the factor is 26.5. John’s required minimum distribution for 2014 is $10,000 ($265,000 ÷ 26.5). That amount needs to be distributed to him by April 1, 2015. To calculate John’s RMD for 2015, you will you the actual balance of his account on December 31, 2014, you would not reduce it by the $10,000 distribution taken to satisfy the 2014 requirement.
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