Few things are more confusing in life than what's known as a required minimum distribution or "RMDs." Not to be mistaken for WMDs, or weapons of mass destruction, RMDs are nasty little rules that state when you reach a certain age -- 70Â½ to be precise -- you have to take a required minimum distribution from your tax-deferred retirement account such as an IRA or a 401(k) whether you want to or not. The IRS makes you take it.
Now for the past two years, RMDs have been on hold. Congress, in its collective wisdom, decided to do something to allow retirement nest eggs that were decimated by the market downturn time to recover. So in late 2008 they suspended for one year the IRS rule that requires older Americans to take withdrawals from their individual retirement accounts and 401(k)s.
Here's where things begin to get confusing. The suspension was supposed to be in place only for 2009. And account holders didn't have to withdraw money until April 1 of the year after they turn 70Â½. So, you would figure that people who turned 70Â½ in 2009 would have had until April 1 of 2010 to take their first required distribution. If only it was that simple.
As part of the 2009 suspension, people who turned 70Â½ in 2009 were allowed to skip their first mandatory withdrawalâ€”the one that had to be taken by April 1. That means they now have to take only one distribution this year, and the deadline for that is New Years Eve, Dec. 31.
For people who turn 70Â½ in 2010, the normal rules will apply and they will have until April 1, 2011, to take their first distribution, and until Dec. 31, 2011, to take their second distribution. Still with me?
Now, what is a minimum distribution? Is it the same for everyone? Of course not. There's a formula.
In order to calculate the minimum amount the IRS requires you to withdraw you're your retirement account, you first check your account balance as of the previous Dec. 31. Then you divide that figure by your remaining life expectancy. Wait. You say you don't know how long you're going to life? That's okay. No one's perfect. The government has a way for you to get around that. They let you use the life expectancy number that corresponds to your current age as determined by the actuarial tables in IRS Publication 590.
If you're a beneficiary who inherited one of these accounts the situation is even more confusing. You generally must start taking withdrawals by Dec. 31 of the year, after the year in which the IRA owner died. You can spread the withdrawals over your own life expectancy. For a man who was 50 let's say, and inherited an IRA in 2008, he could spread out withdrawals over 34.2 years even though his life expectancy is only 32.2 more years.
That's because each subsequent year, the man must reduce this life-expectancy figure by one. While distributions were suspended in 2009, beneficiaries must still account for that year. When the man resumes distributions in 2010, he must subtract two years from the 34.2 figure he used in 2008â€”one for 2009 and one for 2010. So if you inherited an account in 2008, the deadline for taking the first withdrawal is Dec. 31, 2010.
I think it's time for my required minimum nap.