A Young Spouse Lowers RMDs and
Increases Portfolio Value for Older Retirees

By Kevin J. Sigler, PhD, CFP

Not only do older people marrying younger spouses make them the envy of onlookers but it may have serious implications on Required Minimum Distributions (RMD) from their retirement accounts and the value of their retirement portfolios. In this article I calculate the RMD for a retiree with a spouse the same age and also with a spouse more than 10 years younger. I demonstrate the effect the age difference between spouses has on the size of the retiree's RMDs and in turn on the value of her overall retirement portfolio over five years of distributions.

For retirement account owners, the required minimum distribution rules apply to traditional IRAs, SEPs and SIMPLE IRAs, qualified plans and 403b accounts. The RMD rules do not apply to the owners of Roth IRA owners, but they do apply to the beneficiaries of Roth IRA.

Distributions from retirement accounts have a required beginning date (RBD) which is April 1 of the year following the year one reaches age 70.5. Failure to take a RMD results in penalty of 50 percent of that portion which is not taken. If the account owner is still employed at age 70.5 and he participates in a qualified plan or 403(b) account, he may be allowed to defer the start of his RMDs until after retirement. This doesn't apply, however, if the retirement account holder owns at least 5 percent of the business that adopted the plan.

The formula for calculating RMDs is as follows.

Prior year end (Dec 31) total of the Tax Deferred Retirement Account

Divided by

The number from the Uniform Lifetime Table based upon attained age in the current year

Equals

The RMD for the Tax Deferred Account in the current year

The regulations on RMDs allow the retirement plan owner to recalculate the required minimum distributions each year. Normally, a 70 year-old retiree uses the factor (27.4) on the Uniform Lifetime Table (Table 1) and divides it into his tax deferred retirement account portfolio balance from the prior December 31st. The following year he must calculate a RMD using the prior December 31st retirement account balance divided by the factor for age 71 (26.5).

The exception for using the Uniform Lifetime Table is when the spouse is the beneficiary of the retirement account and is more than 10 years younger than the participant. In this instance the Joint Life Expectancy Table (Table 2) is used which increases the factor that is divided into the IRA account balance and reduces the required withdrawal.

Example

For the example it is assumed a man is turning age 70.5 in 2005, has a spouse who is also 70 years old, and a total balance of $500,000 in his IRA retirement portfolio on December 31, 2004. Further it is assumed the portfolio grows at 5 percent per year through 2009. The retiree draws his first RMD on December 31, 2005 and will draw four more RMDs on the end of the each of the next four years. Figure 1 and Figure 2 show the size of each of the RMDs and the value of the portfolio at the end of each of the five years.

The RMD for 2005 in Figure 1 is calculated by dividing the 2004 year end balance of $500,000 by the factor from the Lifetime Uniform Table, 27.4. The portfolio value at year end is calculated by growing the 2004 year end balance by 5 percent and then subtracting the RMD of 2005. The RMD and year end balance for the rest of the years is done in the same fashion. Figure 2 calculations are also done this way except the factors from the Joint Life and Survivor Expectancy Table are used.

The ending retirement balances in 2009 using the Uniform Lifetime Table is over $12,000 greater than the balances using the Joint Life and Survivorship Expectancy Table when comparing Figures 1 and 2. The RMD is over $2,000 greater each year for the Figure 1 RMDs compared to Figure 2 RMDs. Having a younger spouse can pay off for retirees enabling them to take lower required minimum distributions from their retirement plans and to build larger retirement account balances after age 70.5.

Kevin Sigler is a Professor of Finance at the University of North Carolina Wilmington in the Department of Economics and Finance in the Cameron School of Business. He received a Ph.D. in finance from the University of Nebraska.