Case of the Week: The Formula for Calculating RMDs

The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and executive compensation arrangements.

A recent call with a financial advisor in New York is representative of a question we commonly receive related to required minimum distributions (RMDs) from IRAs or retirement plans. The advisor asked:

“What is the formula for calculating an RMD? Is it the same for IRAs as it is for qualified retirement plans?”

Highlights of Discussion

For retirement plan participants and traditional IRA owners [including owners of simplified employee pension (SEP) and savings incentive match plans for employees (SIMPLE) IRAs], there is a common formula for calculating RMDs that applies to both IRAs and retirement plans:

Prior year-end account balance ÷ life expectancy = RMD

However, the definition of “prior year-end account balance” is different for IRAs than it is for qualified retirement plans.  Note that an RMD for an IRA may not be satisfied from a retirement plan and vice versa.

For IRAs, the prior year-end account balance is the IRA balance on Dec. 31 of the year before the distribution year (e.g., use the Dec. 31, 2016, IRA balance for a 2017 RMD). Adjust this IRA balance by adding to the IRA balance any of these items:

  • Outstanding rollovers taken within the last 60 days of a year and rolled over after the first of the following year
  • Outstanding transfers taken in one year and completed in the following year
  • Recharacterized conversions along with the net income attributable to the December 31 balance for the year in which the conversion occurred (see Treasury Regulation Section 1.408-8, Q&As 6-8)

For retirement plans, the prior year-end account balance is the retirement plan balance as of the last valuation date in the year before the distribution year. Adjust this amount by:

  • adding any contributions or forfeitures allocated to the account after the valuation date, but made during the valuation year; and
  • subtracting any distributions made in the valuation year that occurred after the valuation date.

Furthermore, do not include the value of any qualifying longevity annuity contract (QLAC) that is held under the plan if purchased on or after July 2, 2014. (See Treasury Regulation Section 1.401(a)(9)-5, Q&A 3.)

The life expectancy an account owner (either an IRA owner or retirement plan participant) uses to calculate his or her RMD is based on one of two tables provided by the IRS for this purpose. These tables can be found in Treas. Reg. 1.401(a)(9)-9 or in IRS Publication 590-B, Appendix B.  Most retirement account owners will use the Uniform Lifetime Table to determine RMDs during their lifetimes.

The Uniform Lifetime Table provides a joint life expectancy figure that is equivalent to the hypothetical joint life expectancy of the retirement account owner and a second individual who is 10 years younger. As previously stated, most retirement account owners will use the Uniform Lifetime Table, even if they have no named beneficiary.

The one exception to using the Uniform Lifetime Table applies if a retirement account owner has a spouse beneficiary who is more than 10 years younger than he or she is. In this situation, the retirement account owner will use the Joint and Last Survivor Table. The result of using the actual joint life expectancy of the account owner and his or her spouse beneficiary who is more than 10 years younger is a smaller RMD for the individual.

Conclusion

While the formula for calculating an RMD from either an IRA or retirement plan appears simple on the surface, attention must be paid to the specific definitions for the numerator and denominator in order to arrive at the true minimum amount that must be distributed.

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“Case of the Week” is the winner of an APEX Award for Publication Excellence for 2017.

Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.

©2017, Retirement Learning Center, LLC. Used with permission.

Add Your Comments

One Comment

  1. David J. Kupstas
    Posted November 17, 2017 at 1:45 pm | Permalink

    Of course, RMDs are done differently in DB plans than they are in qualified defined contribution plans. In a DB, there is no RMD per se. Rather, you have to commence distributions on or before the required beginning date in one form permitted by the plan or another. It is hard to explain this to folks when the world consists mostly of conventional RMDs. In a DB, you can usually select a period certain annuity with COLA that mimics the classic RMD, but it is still not quite the same.

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