RMD Calculation Question

hank

Here’s the statement from a calculator website: “Important: The required minimum distribution calculator was designed to help investors determine their required minimum distribution amounts based on IRS requirements. While it is a helpful tool, you should understand its limitations. This tool assumes that distributions will be made at the beginning of each year. If end of year distributions were assumed the results could be higher.”

(Message appears only after you input numbers / age and ask it to calculate your RMD.)

Here’s the calculator: https://tools.finra.org/rmd/

Does it matter if one takes their distribution early in a year rather than later in the year? I wouldn’t think so since the base amount on which RMD is calculated stays the same (whatever your Traditional IRA totaled at the end of the prior year).

dstone42

Right, Hank. The RMD is established at midnight, Dec 31, by the value of your IRA and your age.
It does not change during the year.
I wonder what the author of the statement was thinking about?
David

msf

Technically, that's not quite correct for employer-sponsored plans. Something I didn't discover until recently. It's the sponsor's responsibility, not yours, to compute a valuation number. While the sponsor should do that near the end of the year, it is not required to do it at the end of the year, or even in December.

Here's a thread on that, including a citation to the appropriate Reg.
https://benefitslink.com/boards/index.php?/topic/31417-rmd-for-fiscal-year-end-plan/

As to the original question, I don't find that disclaimer on the tool page or (at least using google) anywhere on the finra.org site. It may have come from another site that linked to Finra.

The way it reads, it sounds like it's referring you to a calculator showing your estimated IRA balance over time, based on age/RMD and an assumed rate of return. Remaining balance would be affected by when you took your RMDs. But as you said, the RMD amount itself doesn't depend on when in the year you take it.

catch22

@hank
If end of year distributions were assumed the results could be higher.”


Not sure what the statement in question is trying to imply either. As you note, there is indeed a true end of year (Dec. 31) for the calculation.

hank

The site (which I attempted to link) also displays the rate of return necessary over the next year “to maintain your current balance.” That comes up along with the RMD after you enter your numbers.

I wonder if in some way that’s what the disclaimer is referring to? Doesn’t make sense either, since by taking the RMD late in the year the $$ would have remained invested and would have grown more while you waited.

Fortunately, all my Traditional IRA is with Price (more by accident than by design). They’re very good at doing the calculation for you and reminding you over the year to take it. Just wondered about that disclaimer. Have used the same web page for past few years and never noticed it before.

catch22

@hank
Fidelity also provides the RMD number from their internal math calculations.
The "statement" you noted may indeed be a legal disclaimer. The.......your mileage may vary thing.

msf

Okay, now I see the disclaimer.

All it is saying is that if you want to exit the year with the same number of dollars you entered it, after subtracting out the RMD, you need a certain growth rate. It is calculating that rate on the assumption that you take the RMD at the beginning of the year.

Each year, the IRS provides a divisor to tell you what fraction of the Dec 31 balance you must take. At age 70, it's 27.4.

If you take the RMD at the end of the year, all you need to do is grow your balance by
1/divisor (because that's the amount of the RMD you need to replace).

For example, if you start with 27.4 dollars, and grow it by 1/27.4 (about 3.65%), by the end of the year, you'll have grown the account by a buck. That happens to be exactly the RMD for the year.

If you take the $1 RMD at the beginning of the year, you've got less left in the account to grow back to the original $27.40. You have only $26.40; to grow a dollar by the end of the year requires a growth rate of 1/26.4 or about 3.89%. That's what the calculator shows.

More generally, if you take the RMD at the beginning of the year, the growth rate you need is:
1/(divisor - 1).

Simple arithmetic, surrounded by too much legalize.

hank

“Simple arithmetic, surrounded by too much legalize.”

Simple to some I suppose. Thanks.

dstone42

@msf
Nice analysis. I love it when you talk math.
David

Old_Skeet

Nice find @hank. Thanks for posting. I have bookmarked it for future use as an RMD estimator relying on my brokerage house for the exact number. Generally, I take a little more than required just to be on the safe side. Just did my 2019 RMD on Friday based upon my advisor's number.

Anna

After playing with the calculator, I am confused. My husband's RMD has been straight forward since he was born in the first half of the year but I was born in the last month of the year. So I turned 70 in December 2018, will be 70.5 in June 2019 and will be 71 in December 2019. The age 70 divisor is 27.4 and the age 71 divisor is 26.5 according to Table III of IRS Publication 590-B, Distributions Individual Retirement Arrangements (IRAs)). The calculator wants the age the last month of the year which results in a RMD divisor of 26.5 for people reaching 70.5 after the end of the year they turn 70. In other words, if you turn 70.5 in the first six months of the year and age 71 later in the year, the divisor this calculator uses is not 27.4 but is 26.5, skipping the age 70 divisor in favor of the age 71 divisor. If the first divisor is, indeed, skipped for people born in the second half of the year, I have been using the wrong divisor for my first RMD later this year. Which divisor is correct?

Derf

@msf: " If you take the $1 RMD at the beginning of the year, you've got less left in the account to grow back to the original $27.40." How true, but what if the market goes down ? One would have less to lose !
Derf

msf

It's confusing because there are two different questions that are answered by age, but the ways they use age are different:

Q: When must you begin RMDs?
A: in the year you turn 70.5, sort of - you've got until April 1 of the following year to actually withdraw that money

Q: How much is your RMD each year?
A: Your balance at the end of the preceding year, divided by the divisor corresponding to your age at the end of the current year.

Forget the first question if what you want to know is how much your RMD is for 2019.

Take your 2018 year end balance, and divide it by the divisor for age 71, because you'll be 71 at the end of 2019.

Here's an example (Example 1) from IRS Pub 590-B ("Laura was born on Oct 1 .."):
https://www.irs.gov/publications/p590b#en_US_2017_publink1000230740