Do You Know Your RMD?

This week, Gail explains the process of taking required distributions from retirement accounts. Be sure to read this all the way through so you don't miss some crucial exceptions!


A public announcement: Attention "Allen Family:" We are unable to send you a copy of "Last Chance to Get It Right" by Thomas Moore because there is something amiss with your e-mail address and we can't contact you to get your postal address. Please send it to us so we can forward your book.


Hi, Gail —

Can you please explain how required distributions apply to a 401(k)? How do I figure out how much I have to withdraw?




Hi, Mike —

Just as with IRAs, money in a company retirement plan isn't allowed to remain there indefinitely. I know you probably wish you didn't have to take it out, but it helps to remember that you have never, ever paid tax on this money because your contributions were subtracted from your income for the tax year in which you made them. While the IRS has been patient for decades, the tax-deferred growth of this money can't last forever.

To understand how the process of taking your distributions works, there are a couple of terms that are useful to know (by the way, these same rules apply to other types of employer-sponsored retirement plans such as a 403(b), or 457 as well as a traditional IRA*.) Be sure to read this all the way through so you don't miss the "exceptions" — they are extremely important to understand.

Your "distribution calendar year" is the year for which you have to take a distribution (duh!).

Your first distribution calendar year is the year in which you turn 70 1/2.

In every year except the first distribution calendar year, you have to take a minimum amount out of your 401(k) by the end of each distribution calendar year, i.e. by December 31.

For the first distribution calendar year, however, the IRS gives you a three-month extension. Instead of taking your required distribution by December 31 of the year you turn 70 1/2, you have until April 1 of the following year to do so. After that, all subsequent required withdrawals must be taken by the end of that particular year.

While it may seem crazy not to delay your first year's required withdrawal, it can create a potential tax problem: if you postpone taking your first distribution until the April 1 deadline, you have to take TWO withdrawals that year: the one for the previous year (in which you turned 70 1/2) and the one for the current year (in which you turn 71). If your retirement plan balance is substantial, bunching two distributions into one year could push you into a higher marginal tax bracket.

So, although most people hate sending the government money before they absolutely have to, it pays to do some rough arithmetic, or have a financial advisor do it for you. Postponing your first distribution until the April 1 deadline could mean you would have to send the IRS more in taxes than if you actually took your first required withdrawal in the year you turn 70 1/2.

Exception to the required start date: If you are still employed at age 70 1/2 and do not own 5% or more of the company you work for, then you can delay taking any withdrawals from your 401(k) until you retire.

Caution: this exception does not apply to traditional IRAs!

As you may have noticed, I've mentioned the term "required distribution" or "required withdrawal." This refers to the minimum amount you must, by law, withdraw from your retirement account. So another term you need to be aware of is "required minimum distribution," or RMD. (You can always take out more than the "minimum." Of course, the bigger the withdrawal, the bigger the check you're going to write to the IRS for taxes on this money.)

This "minimum" amount you have to withdraw is based on life expectancies. You can look this up in IRS Publication 590 which can be found on the IRS Web site. (Isn't it nice to know the IRS has already figured out how long you're going to live?)

Most people will use the "Uniform Lifetime" table (page 97). The number next to your age gives you the predicted life expectancy of you and a beneficiary. These numbers are based on the assumption that the beneficiary of your retirement account is no more than 10 years younger than you are. Even if he/she is, you still have to use the numbers off the table. So naming your grandchild as your beneficiary won't do you any good: you won't get a longer life expectancy.

But there is an important exception to this: If your spouse is your primary beneficiary, AND your spouse is more than ten years younger than you are, then you don't use the "Uniform" table. In this case, you use the "Joint Life and Last Survivor" life expectancy table (starts on page 83). This will give you a bigger number.

This is important because it affects how much you are required to withdraw. That's because, to figure your RMD each year, you start by looking up the value of your retirement account as of December 31 of the previous year. Then you divide this by the life expectancy factor that corresponds to your age in the year for which you are taking your distribution, i.e. your "distribution calendar year." It looks like this:

Retirement Account Value on 12/31 previous year ÷ Life Expectancy Factor for this year  = Required Minimum Distribution for this year

For instance, let's assume your spouse is the primary beneficiary on your 401(k). In 2004 you are 74 and she is 70. When you dig out the year-end statement you received from your 401(k) provider, you find that your account was worth $400,000 on December 31, 2003.

Although your spouse is your beneficiary, she is not more than ten years younger than you are. So you would use the life expectancy factor from the "Uniform" table. This tells you that the two of you have a joint life expectancy of 23.8 years. Now you can calculate the minimum you must withdraw this year:

$400,000 ÷ 23.8 = $16,806.72

If your 45-year old son were your beneficiary, you would still use the same life expectancy factor. Remember: you use the "Uniform" table when either:

1) your spouse is your beneficiary and he/she is not more than ten years younger than you are; or

2) for all non-spouse beneficiaries, regardless of age. In other words, even though your son is a lot younger, your RMD would be the same amount as in the above example.

However, if your spouse were your beneficiary and was, say, 58 years old (you rascal!), you would not use 23.8 as the divisor. In this case, you would get your number from the "Joint and Survivor" life expectancy tables, which give you a "factor" of 28.1 = $14,234.88

$400,000 ÷ 28.1= $14,234.88

Notice: the bigger the life expectancy factor (bottom number), the less you are required to withdraw.

And to answer a question I'm asked a lot: You are not allowed to roll over your RMD into another retirement account, such as an IRA. A rollover means the amount withdrawn would avoid income tax. Defeats the purpose of a required distribution.


*Exception: If you are the owner of a Roth IRA, you never have to take required distributions. Your money can continue to grow tax-free until you die. At that point, if your spouse is the beneficiary of your Roth IRA, he/she can roll it over into his/her name. As the new owner of this Roth IRA, a surviving spouse does not have to take RMDs, either.


But be careful! If you leave your Roth IRA to anyone who is not your spouse, a rollover is not possible. Your name will stay on the Roth IRA. A non-spouse beneficiary of a Roth must begin taking annual minimum withdrawals from the inherited Roth IRA by December 31 of the year after the IRA owner died. The amount of the withdrawal will be based on the life expectancy of the beneficiary. Thus, the younger the beneficiary, the longer the life expectancy and the smaller the annual distribution.

Since these withdrawals are coming from a Roth IRA, they are tax-free. However, if the beneficiary misses the December 31 deadline, the entire Roth IRA will have to be emptied within 5 years after the owner died. A crying shame, because that beneficiary could have potentially had decades of tax-free compounding going on with that Roth.

For example, suppose you carve out a piece of your traditional IRA and pay the taxes due to convert it to a tax-free Roth IRA. We'll use $50,000. The primary beneficiary of this Roth IRA is your granddaughter, who is 5 years old in 2004. You die this year at age 74 and she inherits your Roth. Based on her age, she has a life expectancy of 76.7 years. Since she is a non-spouse beneficiary, a rollover is not possible. However, she has the option of stretching out withdrawals based on her very long life expectancy. To elect this option, your granddaughter must start taking required minimum distributions each year, taking the first one no later than December 31, 2005.

Caution: Clearly a 5-year old is not going to be able to do this, so be sure her guardian takes the distributions on her behalf until she reaches the legal age at which she can own financial assets.

Assuming your Roth IRA had an average return of 8 percent a year and that your granddaughter just took out the minimum amount each year for 76.7 years, she would receive (are you sitting down?) $3.7 MILLION.

And every cent would be tax-free.

Now that's what I call a legacy!

But if she misses the deadline to start withdrawals, she will have to empty the Roth IRA by the end of 2009, losing seven decades of tax-free growth. At best, she'd receive around $73,000. While it would be tax-free, it's a far cry from $3.7 million.

Hope this clears things up, Mike!



If you have a question for Gail Buckner and the Your $ Matters column, send them to , along with your name and phone number.

Gail Buckner and regret that all letters cannot be addressed and that some might be combined in order to more completely address a topic.

To access Gail's past columns, simply use our new "Search" function: type in "Buckner" and you'll be able to get all Your $ Matters columns since April 2001.

The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.