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Retirement Income Redesigned: Master Plans for Distribution: An Adviser's Guide for Funding Boomers' Best Years by Deena B. Katz, Harold Evensky

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Chapter 9. Understanding Required Minimum Distributions

april k. caudill

No discussion of distribution planning would be complete without an explanation of the rules that govern lifetime required minimum distributions (RMDs). These somewhat complex rules, set forth in the Internal Revenue Code and amplified by extensive regulations, affect every individual who lives much past age 70 while owning an individual retirement account (IRA),[61] qualified plan account, or taxsheltered (Section 403(b)) annuity.[62]

The minimum-distribution requirements actually serve two useful functions. First, they implement the legislative intent of assuring that retirement accumulations are in fact used for funding retirement rather than as a tax shelter of indefinite duration or as a means of transferring wealth to the next generation. Second, they give taxpayers a ballpark idea of how much (or how little) they should be taking out of their retirement accounts to make the funds last for their average life expectancy.

The Rules and How They Apply

Essentially, the minimum-distribution rules require the IRA owner or plan participant to begin receiving distributions from the account by his required beginning date (which usually occurs shortly after age 70½) and to receive at least a certain amount each year to avoid a penalty. The penalty for noncompliance is substantial—50 percent of the amount that should have been taken—and it's built into Form 1040 among the tax payment provisions. Consequently, if the ...

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