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The Internal Revenue Code ("IRC") mandates that an IRA owner must begin taking required minimum distributions ("RMD") at age 70½.  However, a strict reading of the pertinent sections of the IRC permit an IRA owner to delay taking RMDs until April 1^st of the year following the year in which he or she turns 70½.  This date is known as the required beginning date ("RBD").

From the RBD forward, a distribution must be taken by December 31^st of each year.  Typically, clients are advised not to wait until the RBD because the client will be forced to take a second distribution in the same year.  This will result in two taxable distributions in one year - a situation that most would rather avoid.

It is important to note that there is a difference between the RMD rules governing a traditional IRA versus an employer-sponsored plan ("ESP").  RMDs from an ESP must begin on the later of the participant's:

• attaining age 70½; or
• retiring from the employer maintaining the plan.

Like the law related to an IRA, the required beginning date for receiving the first RMD from an ESP is April 1^st of the year following the participant's reaching at 70½ or retiring; this date is known as the RBD.

As for the RMD amount, it is equal to the value of the traditional IRA, or the account balance ESP, as it was on December 31^st of the prior year, divided by the individual's remaining life expectancy.  The federal government has made the determination of remaining life expectancy easy in that it has published a Uniform Lifetime Table ("ULT").  The ULT is age based and does not place any value on gender.  For example, a person who is age 75 has a 22.9 year life expectancy.  If his or her account balance was $150,000, he or she would have to take an RMD of $6,550.22.

If an IRA owner fails to take the proscribed RMD by the RBD, the tax penalty is 50% of the insufficiency.  Thus, in the aforementioned example, if the IRA owner only took a distribution of $2,550, the tax penalty for failing to take the $4,000 insufficiency is a $2,000 tax penalty.  If the IRA owner was in the 28% tax bracket, his or her federal income tax on the $6,550.22 would have been only $1,834.06.  However, as a result of not taking the proper RMD, the federal income tax, along with the RMD tax penalty, together, totaled $2,714.00.  The end result in this case was a 106% federal tax.  Thus, with the RMD tax penalty being quite severe, it should always be avoided.