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What are Required Minimum Distributions?

IRC Section 401(a)(9) - Qualified pension, profit-sharing, and stock bonus plans - Required distributions provides statutory guidance on RMDs. An IRS Retirement Plans FAQs regarding the Required Minimum Distributions also provides a definition:

Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether he or she is retired.

Retirement plan participants and IRA owners are responsible for taking the correct amount of RMDs on time every year from their accounts, and they face stiff penalties for failure to take RMDs.

When a retirement plan account owner or IRA owner dies before RMDs have begun, different RMD rules apply to the beneficiary of the account or IRA. Generally, the entire amount of the owner's benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner's death, or (2) over the life of the beneficiary starting no later than one year following the owner's death. See Publication 590 - Individual Retirement Arrangements (IRAs) for complete details on when beneficiaries must start receiving RMDs.

The IRS RMD information page also answers the following questions

  1. What types of retirement plans require minimum distributions?

  2. When is the deadline for receiving a RMD from an IRA?

  3. How is the amount of the RMD calculated?

  4. Can an account owner just take a RMD from one account instead of separately from each account?

  5. Who calculates the amount of the RMD?

  6. Can an account owner withdraw more than the RMD?

  7. What happens if a person does not take a RMD by the required deadline?

  8. Can the penalty for not taking the full RMD be waived?

  9. Can a distribution in excess of the RMD for one year be applied to the RMD for a future year?

  10. How are RMDs taxed?

  11. Can RMD amounts be rolled over into another tax-deferred account?

Required Beginning Date

Generally, all participants must receive their first RMD by the April 1 of the year following the year they meet both of the following requirements: attain age 70½ and terminate employment. This date is referred to as the participant's required beginning date.

Let's look at an example of a participant that attained age 70 ½ and terminated service with the company in 2011:

  • Required Beginning Date – Since the participant met both requirements in 2011, the required beginning date is April 1, 2012.

  • RMD #1 - The participant must receive their first RMD by April 1, 2012. This RMD is the participant's 2011 RMD and is calculated using the participant’s 2010 account balance.

  • RMD #2 - The participant must receive their second RMD by December 31, 2012. This RMD is the participant's 2012 RMD and is calculated using the participant’s 2011 account balance.

  • Each subsequent RMD - Each subsequent RMD will be due on each subsequent December 31 (calculated using the prior year's balance).

Some plans provide eligible participants with the option to take their first RMD in the year they satisfy both requirements. Using the example, the participant would take their first RMD in 2011.

Another option is for the participant to take both their first and second RMDs before April 1 of the year the RMDs are due. Using the example, the first two RMDs would be taken in 2012 by April 1, 2012.

What about the RMD Waiver?

You may be aware of the waiver of the requirement to take 2009 Required Minimum Distributions (RMDs). There is no waiver for RMDs for calendar years after 2009.  If you have not already done so, a plan amendment must be adopted by the last day of 2011 plan year to document how the 2009 RMDs were processed.

RMD Worksheets

The IRS has two RMD worksheets that you may find useful:


RMD Calculators

Here are two online RMD calculators you may find useful.

  1. RMD Planner - Annual Distribution Calculator – This calculator requires you to enter the date of birth, status of the designated beneficiary, the designated beneficiary's date of birth (if applicable), and the prior year-end balance.

  2. Calculate Your Minimum Required Distribution calculator – This is a basic calculator that only requires your age at the end of this year and the balance.

In previous years I have tested some of the calculators using the Uniform Lifetime Table and my calculation agreed with the online calculators. The IRS has provided links to the Joint and Last Survivor TableUniform Lifetime Table, and Single Life Expectancy Table.

Do you have enough cash in the ESOP to pay RMDs? 

Another factor to consider for RMDs is that the plan may not have enough cash to pay to the participant(s) to satisfy the RMD requirements. If this is the case, the plan will most likely have three options:

  • The stock will be repurchased (recycled) in the plan to other participants - cash will need to be contributed to the plan.

  • The stock will be sold and the proceeds used to pay the participants – a stock appraisal on the date of the sale will need to be obtained.

  • The stock will be distributed and put back to the company (or the ESOP). It is important to note that as it gets closer to December 31, it becomes more likely that the stock value may be "stale" (see above discussion) and not an accurate reflection of the actual stock value.

This situation can be avoided if you have identified RMDs ahead of time and have a well-planned distribution policy.

What value should be used to determine the number of shares to distribute?

The value of the distribution is calculated using the fair market value of the stock as of the date of the distribution, and the value of the distribution must be at least equal to the amount required to be distributed to satisfy the RMD requirements. RMDs – How many shares to distribute? discusses an example.

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