Everyone who owns a traditional IRA must eventually pay Uncle
Sam income tax on required minimum distributions. But the rules for
calculating RMDs differ depending on whether you're the original
owner, a spouse beneficiary or a nonspouse heir. The rules have one
thing in common: If you don't take out enough money, the IRS could
sock you with a hefty penalty.
When the original owner of a traditional IRA hits age 70 1/2, he
must start taking distributions. The deadline for the first RMD is
April 1 of the year after he turns 70 1/2. All subsequent RMDs must
be taken by December 31 of each tax year. To avoid a big tax bite
by taking the first and second distributions in the same year, Mike
Piershale, president of Piershale Financial Group, in Crystal Lake,
Ill., says "most people will take the first distribution in the
year they turn 70 1/2." If you fail to take an RMD on time, the IRS
will sock you with a 50% penalty of the missed amount--if the RMD
is $10,000, that's a $5,000 penalty.
To calculate the RMD, take the account balance on December 31 of
the previous tax year and divide that by a factor from IRS Table
III, called the Uniform Lifetime Table (find the tables in IRS
Publication 590). That factor is based on your remaining life
expectancy. (In this story, each RMD calculation is for 2014 and
assumes a 2013 year-end balance of $500,000.)
The RMD for a 72-year-old using a life expectancy factor of
25.6, for instance, would be $19,531. An 80-year-old uses a factor
of 18.7, resulting in an RMD of $26,738--about $7,200 more.
Singles and most married owners consult Table III. The exception
is an owner with a spouse who is more than ten years younger and is
the IRA's sole beneficiary. He uses Table II, the Joint Life and
Last Survivor Table. "You don't have to take the money out as
fast," says Travis Sollinger, a financial planner at Fort Pitt
Capital Group, in Pittsburgh. The RMD of a 72-year-old husband with
a 55-year-old wife would be about $3,300 less than the 72-year-old
above (see table).
A spouse has two options when inheriting an IRA: Roll the money
into her own IRA, or remain a named beneficiary of the inherited
If she rolls the account into her own IRA, she won't start RMDs
until she turns 70 1/2, and she will use Table III. This is the
route most spouses take, Sollinger says.
A widow who stays a named beneficiary won't take RMDs until her
late husband would have turned 70 1/2. Then, she must take
distributions based on her life expectancy. She uses Table I, which
all beneficiaries use. But she has an advantage over nonspouse
beneficiaries (described next). Each year, says Jeffrey Levine, IRA
technical consultant for Ed Slott and Co., which provides IRA
advice, "the spouse gets to recalculate life expectancy, which
results in smaller distributions."
But the RMDs are lower as an owner. Say the widow is 75. If she
keeps an inherited IRA, she uses a factor of 13.4. If she rolls the
money into her IRA, the factor is 22.9, and she will take out about
$15,500 less than the widow with the inherited IRA (read
When a Surviving Spouse Inherits an IRA
A nonspouse heir starts RMDs the year after the original owner dies
and consults Table I for his first RMD. For each subsequent year,
the nonspouse heir subtracts one from that factor.
If the nonspouse heir is 55 at his first RMD, he will use a
factor of 29.6 from Table I. For his second RMD, he uses 28.6,
instead of the table's factor of 28.7 for age 56. By the time he
reaches age 75, he will use a factor of 9.6 instead of the table's
13.4. At age 75 in 2014, his RMD will be $52,083, about $15,000
more than if he were a spousal heir who remains a beneficiary.
Nonspouse heirs who mistakenly take RMDs as if they were an
owner or a spousal beneficiary will take out too little. They'll
owe the 50% penalty on the shortfall.