The terms of an independent retirement account or annuity must include several minimum distribution rules, which Congress imposed to ensure that IRAs are primarily used as retirement savings media, not as vehicles to build wealth for transmission to heirs. As discussed below, these rules provide separately for distributions to IRA owners and distributions to beneficiaries after the death of an IRA owner. An IRA owner is an individual who establishes and contributes to an IRA for the benefit of himself or herself and his or her beneficiaries.
Minimum distributions to IRA owners
An IRA must, by its terms, require the account or annuity to be fully distributed not later than April 1 of the year following the calendar year during which the IRA owner attains age 70 and 1/2 or be distributed by annual or more frequent payments over a period beginning by that date and continuing not longer than for the owner's life, the lives of the owner and his or her beneficiary, or a period not longer than the life expectancy of the owner or the owner and beneficiary. April 1 of the year following the calendar year during which the owner reaches age 70 and 1/2 is the required beginning date.
How do I determine what the minimum annual distribution for a Traditional IRA should be?
The annual minimum distribution to an IRA owner under an IRA is determined by rules for defined contribution plans and under an individual retirement annuity by rules for defined benefit plans. Under the former, the minimum distribution for a “distribution calendar year” is the owner's “account” for the year, divided by an “applicable distribution period.” An owner's distribution calendar years are the years during which he or she reaches age 70 1/2 and each subsequent year during his or her life. The account for a distribution calendar year is its value as of end of the preceding calendar year. The “applicable distribution period” changes annually and is usually taken from a Uniform Lifetime Table. It is, for example, 27.4 for the distribution calendar year during which an owner reaches age 70, 18.7 for the year of his or her eightieth birthday, and 11.4 for the year during which an owner turns 90. The minimum distribution for the first distribution calendar year must be made by April 1 of the following year (the required beginning date), and distributions for the distribution calendar year containing the required beginning date and all other years must be made by the end of the year. The minimum distribution for a year is not reduced by distributions for earlier years in excess of the minimums for those years.
For example, assume Joe, who was born on September 1, 1944, and is unmarried, has an IRA with a balance of $265,000 at the end of 2014 and $268,472 at the end of 2015. Since Joe reaches age 70 1/2 on March 1, 2015, his required beginning date is April 1, 2016, and his first distribution calendar year is 2015. The minimum distribution for 2015 is $10,000, which is $265,000 (the account at the end of 2014) divided by 26.5 (the applicable distribution period for a distribution calendar year during which an owner turns 71). This amount must be distributed to Joe not later than April 1, 2016. The minimum distribution for 2016 is $10,500, computed as the account balance at the end of 2015 ($268,472), divided by the applicable distribution period for a 72-year-old (25.6); it must be distributed not later than December 31, 2016.