What is the formula for calculating required minimum distributions (RMDs); and is it the same for IRAs as it is for qualified retirement plans?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.  A recent call with a financial advisor in New York is representative of a question we commonly receive related to RMDs.

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 December 31 of the year before the distribution year (e.g., use the December 31, 2016, IRA balance for a 2017 RMD). Adjust this IRA balance by adding to the IRA balance any

• 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; and
• 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. 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.