Taking Care of Mom and Dad: Calculating the Minimum Required Distribution
So, when your parent pass age 70, they have to start taking money out of their retirement accounts. Fair enough. But how much do they need to take out?
As we noted, they can take out all of the money in their defined contribution plans. But, if they have a lot of money put away, that could mean a very large tax bite due all at once.
A better alternative is to set up a schedule for taking out money, as little as your parents need to live reasonably well...or as little as the tax rules allow. This minimizes or at least delays the tax bite.
According to the IRS, your parents calculate their minimum required distribution for each year by dividing their IRA account balance on December 31 of the preceding year by the applicable distribution period or life expectancy. These periods -- which vary according to your parents' age, the age of their spouses (especially if those spouses are more than 10 years younger) and the age of any beneficiary who's not a spouse -- are published each year by the IRS.
Example: Your mom was born on October 1, 1931. She is an unmarried participant in a defined contribution plan. She reaches age 70½ in 2002. Her required beginning date is April 1, 2003. As of December 31, 2001, her account balance was $25,300. According to IRA tables, the distribution period for someone her age (71) is 25.3 years. Her minimum required distribution for 2002 is $1,000 ($25,300 divided by 25.3). That amount needs to be distributed to her by April 1, 2003.
Another plus to keeping as much money as possible in the retirement account is that it can continue to increase in value for your parents. In a good investment year, it can even grow faster than your parents withdraw money.
Same example: Your mom's account does well in 2002, growing to $26,400 on December 31. The account balance of $26,400 is reduced by the $1,000 minimum required distribution. Consequently, she uses an account balance of $25,400 to determine her minimum required distribution for 2003. It has increased slightly, even though your mom took money out.
The IRS has separate life expectancy tables for people whose spouses are more than 10 years younger than they are...or whose designated beneficiaries are young. These life expectancy numbers are longer than the standard ones -- reflecting the younger participants. The longer numbers mean lower minimum required distributions. All three of the life expectancy tables are located in IRS Publication 590 and can be downloaded from the IRS's Web site.
If your parents have more than one traditional IRA, they have to determine the minimum required distribution separately for each IRA.
However, they can total these minimum amounts and take the total from any one or more of the IRAs.
Your parents can always take out more than the minimum required distribution; but they don't get credit for the additional amount when determining the minimum required amounts for future years.
Of course, your parents still reduce their IRA account balance by the amount they take out. They just can't count the extra amount distributed as an amount required to be distributed in a later year.
Example: Your dad became 70½ on December 15, 2001. His IRA account balance on December 31, 2000, was $38,400. He figured his minimum required distribution for 2001 was $1,466 ($38,400 divided by a life expectancy of 26.2 years). But, by December 31, 2001, he'd actually taken out distributions totaling $3,600 -- $2,134 more than was required. He can't use that $2,134 to reduce the amount he's required to withdraw for 2002, but his IRA account balance must be reduced by the full $3,600 to figure his minimum required distribution for the next year. So, his reduced IRA account balance on December 31, 2001, was $34,800. His minimum required distribution for 2002 is then $1,375 ($34,800 divided by 25.3). During 2002, he must receive distributions of at least that amount.
A last point to remember: Your parents can take a minimum distribution in installments (monthly or quarterly, for instance) as long as the total for a year equal at least the minimum distribution required.
