What is a Required Minimum Distribution?

A required minimum distribution is the lowest amount of cash that must be disbursed from some type of retirement plan once a participant reaches a specified calendar age. Most examples of the Individual Retirement Account (IRA) offered in the United States include provisions for managing this task in the plan’s terms and conditions. In the United Kingdom, the Individual Savings Account (ISA) is also likely to include this type of provision.

With most IRA plans, the required minimum distribution does not have to begin at the time the individual reaches early retirement or even the standard retirement age of sixty-five. Many plans will allow investors to defer receipt of any disbursements until the age of seventy. This is particularly true in situations where employees choose to work beyond the standard retirement age. Since the terms may vary from one type of IRA to another, it is important for employees to talk with plan administrators and determine if it is possible to defer that required minimum distribution, and what must be done in order to manage the deferral.

The calculation of the amount of that required minimum distribution involves identifying the fair market value of the plan as of the most currently completed annual period. That figure is divided by the life expectancy of the plan recipient. Life expectancy in this instance is sometimes identified in plan terms and conditions as the applicable distribution period. For example, if the individual’s life expectancy is another twenty years, the balance in the account is divided by twenty, making it possible to determine the minimum amount that must be distributed from the plan in that current year.

One benefit of deferring the required minimum distribution for at least a few years is the opportunity to continue making contributions to the plan. This means that additional income is generated by the interest paid into the plan, effectively providing more resources once the recipient does begin to receive disbursements from the IRA or ISA. Assuming that the plan recipient is able to contribute the maximum amount allowed during each of those additional years when deferral is possible, this additional amount can be significant.

In many nations that offer an IRA or ISA plan, national revenue agencies provide life expectancy tables that aid in determining the amount of the required minimum distribution. Those tables can be used to determine the distribution amount for both employee sponsored plans of this type, or any IRA or ISA that is established by individuals. While most employer sponsored plans do provide the opportunity to defer the distribution until the recipient reaches the age of seventy, not all personal or individual plans provide this option. When that is the case, the distribution typically begins when the individual reaches retirement age that is considered standard in that particular nation.