By FPA member Mike Bonacorsi, CFP®
Last Updated: February 15, 2010
In 2009, the requirement for Required Minimum Distributions (RMDs) was suspended under the Worker, Retiree, and Employer Recovery Act. In 2010, the requirement returns for those who are or will be turning 70½ in 2010 with Individual Retirement Accounts (IRAs) and employer-sponsored retirement plans. Those who are still employed and who have a plan with their employer may delay the distribution from that plan until retirement. The requirement also returns for those who have an inherited IRA and were taking RMDs, as well.
By way of background, beginning the year you reach 70½ you must take an annual RMD from these plans based on the previous December 31 closing balance and your life expectancy as determined by the IRS. The first year only, an option exists to wait until April 1 of the following year, however, that will require two distributions, one for the past year and one for the current year.
There are three calculations possible:
- Joint and Last Survivor — used for an account where the sole beneficiary is a spouse more than 10 years younger than the account owner.
- Uniform Lifetime — used for an account where the spouse is not the sole beneficiary or not more than 10 years younger.
- Single Life — used by the beneficiary of an inherited account.
If multiple IRAs exist, the RMD is calculated for each individual account. However, the total distribution amount may be taken from one account or spread among the others — this also holds true for 403(b) plans. Required distributions for other retirement plans, such as 401(k) and 457 plans, must be calculated and distributed from each individual account.
Failure to take your RMD when required may result in a penalty of 50 percent of the undistributed amount. A waiver may be possible if the owner can show the shortfall was due to error and steps have been taken to correct it.
If you are approaching 70½ this year or reached it last year when RMDs were suspended, be aware of your requirements for this year. If you had been receiving distributions in the past but did not take a distribution last year because of the suspension, realize that your requirement restarts in 2010. Make sure you contact the custodians and administrators to reinstate any automatic payments that were canceled last year due to the waiver.
FPA member Mike Bonacorsi, CFP®, is a public speaker and award-winning author of "Retirement Readiness: A Guide to Creating Your Vision, Knowing Your Position, and Preparing for Your Future."
