Hi, Gail-

I’ve been taking annual withdrawals from the IRA inherited from my mother 4 years ago, but I understand that this year I don’t have to take one. I’m 47 (I’ll be 48 in August) and my question is, what age do I use to figure how much to take out next year?

Thanks,

David

Dear David-

Great question! As I explained in a previous column, legislation passed in late December gives anyone who would ordinarily have to take an annual “required minimum distribution” [RMD] from a retirement account the choice of skipping it this year. And this year only.

The general formula for calculating the “minimum” amount that must be withdrawn is as follows:

• RMD =  Account Value on 12/31 of Previous Year/Life Expectancy of Person Taking Withdrawal

Most individuals taking RMDs are retirees. That’s because if it’s your own account  -- IRA, 401(k), 403(b), 457 -- you must generally start taking annual withdrawals after you reach age 70. Technically, you have until April 1st of the year following the year you turn 70½ to take your first RMD. Each year after that, your withdrawal must come out by December 31st.

But as your case illustrates, there’s an additional category of folks who have to take required minimum distributions: non-spouse beneficiaries who inherit retirement plan assets. They must begin minimum withdrawals from the inherited account  -- including a Roth IRA -- by Dec. 31st of the year following the year the account owner died.

The RMD for a non-spouse beneficiary is calculated slightly differently and is based on their age in the year after the account owner died.

Based on the information you’ve provided, your mom died in 2005. Thus, you had to begin taking annual minimum withdrawals from her IRA by December 31st 2006. Your age that year was 45. According to the IRS, your life expectancy that year was 38.8 years. Here’s how your first RMD would have been calculated:

• First RMD (2006) = Value of Mom’s IRA on Dec.31,2005/38.8

Each subsequent year, a non-spouse beneficiary subtracts one from the divisor and uses that to calculate that year’s RMD.

• Second RMD (2007) = Value of Mom’s IRA on Dec. 31, 2006/ 37.8
• Third RMD (2008) = Value of Mom’s IRA on Dec. 31, 2007/ 36.8

If the regulation had not been changed your fourth RMD (2009) would have been:

• Value of Mom’s IRA on Dec.31, 2008/ 35.8

Even though required distributions are suspended for this year, your life expectancy adjustment is not. According to Boston attorney Natalie Choate, author of Life and Death Planning for Retirement Benefits, says “the IRS wisely decided it would be hopeless to get people to pretend they’re a year younger than they are.”

As a result, when you resume RMD’s from your mom’s IRA in 2010, here’s how you’ll calculate it:

• Value of Mom’s IRA on Dec. 31, 2009/4.8

The intention of allowing folks to skip this year’s required minimum distribution was to give those who can afford it, the chance to leave their money invested and hopefully give their retirement account a chance to recover some of the value it’s lost in this recent bear market. Inevitably, changes to the tax code- even temporary ones- raise questions.
congratulations for thinking ahead to next year!

Gail

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