Beneficiary IRA Distributions (RMD) Made Simple

If you own an Inherited IRA, you have required beneficiary IRA distributions you must take. It doesn’t matter how old you are. And sadly, it doesn’t even matter if you need or want the money. The IRS boys want you to take your distributions starting the year after you inherit the account.  (Read “IRA Beneficiary Rules“.)

Once you do, they’ll lick their chops just thinking about the tax money you’ll send in.  Please don’t leave the calculation of your beneficiary IRA RMD (required minimum distribution) up to your custodian. The kid who does these calculations earns $12 an hour and doesn’t know what he’s doing. You must confirm the calculation yourself.

Fortunately, it’s not that tough.   Here’s your formula to make the calculations:

1. Subtract the year of birth of the beneficiary from the year the decedent died. Then add one. This is the age of the beneficiary in the first year she must take a distribution.
2. Look up the factor on IRS Publication 590 table 1. (This is the factor for the first year you take distributions. For each subsequent year, subtract “1” from the original factor to determine the new factor. )

3. Divide the account balance at the end of the year by the factor.
4. Take the distribution.

EXAMPLE 1

I was born in 1957 and I inherit money from Joe who died in 2011. I take this year, I add “1” and then subtract my year of birth. The result is 55.
2011+1-1957=55.  So, I’ll be 55 in 2012 and that’s the year I must take my first distribution. So far, so good.

Now I go to the IRS publication 590 and look up my factor which is 29.6. I’ll use that factor in 2012. In 2013, I’ll use 28.6. in 2014 I’ll use 27.6 etc

EXAMPLE 2

Again, I was born in 1957. I inherited money from Joe who died in 2000. Let’s do the calculations using the formula above. I’ll take 2000 and add 1 and then subtract 1957 to arrive at 44. That was my age in 2001 and it’s important because that’s the year I had to start taking my RMD.

Then I’ll look up my factor and get 39.8. That’s the factor I should have used in 2001. But now it’s 10 years later. So my factor is 29.8. If the balance on my account on 12/31/2010 was $100,0000, I’ll divide $100,000 by 29.8 and take a distribution of $3356. Simple as pie.

If you think this is complicated, please give it a try anyway. You’ll see that it’s simple.  Most banks and IRA custodians get this wrong.  When they do, you end up with IRS trouble.  Take a few minutes now to make sure this is done correctly.