How to Calculate Your Required Minimum Distribution (RMD)

Many folks I talk with are surprised by the fact that individuals must begin taking withdrawals from their retirement accounts once they reach a certain age. Some are also caught off guard when inheriting an IRA because the IRS forces you to pull money out of those accounts as well.

What is a Required Minimum Distribution

Required Minimum Distributions, or RMDs, are generally a minimum amount a retirement account owner must take out once they reach age 70 1/2.

The rules also apply to retirement account beneficiaries that must begin taking distributions also.

For example, let’s say you inherit an IRA from your Uncle Joe who is 75 years old, you would need to take an IRA withdrawal from the account each and every year to satisfy IRS guidelines.

Roth IRAs do not have a 70 1/2 rule, but must be withdrawan (tax-free) when inherited.

How Do You Calculate RMDs?

Generally, a Required Minimum Distribution is figured by dividing the December 31st value of the prior year for that IRA or retirement plan account by a life expectancy factor that IRS publishes in Publication 590, Individual Retirement Arrangements (IRAs). There are three separate tables on the IRS site listed here:

  • The Joint and Last Survivor Table is used by an account owner whose sole beneficiary of the account is his or her spouse and is more than 10 years younger than the account owner;
  • The Uniform Lifetime Table is used by account owners whose spouse is not the sole beneficiary or whose spouse is not more than 10 years younger; and
  • The Single Life Expectancy Tableis used by a beneficiary of an account.

An RMD Example for an Inherited IRA

Let’s assume you are a 35-year-old who receives an inheritance from Uncle Joe who dies on December 31st with an IRA value of $100,000. You think to yourself, “Well this is a great kickstart to my retirement plans, so I’ll just leave the money in the account and use that for retirement.”

You’ll have to think again. The IRS will want you to withdraw from the IRA because they want tax revenue! Thankfully there are exceptions to the 10% penalty rule, so you won’t have to worry about that.

You check out your life expectancy table and match up the table on the left, which is Uncle Joe’s age of 75 and your own age on the top and it says 48.6. So here’s what you’d do:

Year End Value / Life Expectancy Value = RMD

So in this case you are looking at:

$100,000 / 48.6 = $2,057.61

You’ll need to pull this money out each and every year for the rest of the IRA lifespan.

An RMD Example When Turning Age 70 1/2

Calculating the RMD requires less fishing around for tables and matching up your age with the deceased IRA account owner’s age.

You simply check out this worksheet which shows you the distribution period to figure your IRA withdrawal amounts.

Let’s say you’ve done a fantastic job saving money for retirement and you built up a nice nest egg worth $500,000, and you turn age 70 1/2.

Again the formula is:

December 31st Value / Distribution Period = RMD

$500,000 / 27.4 = $18,248

You will need to pull out over $18,000 from your IRA in that year alone! Don’t even think about avoiding this withdrawal, because the IRS will hit you with a 50% penalty if you do.

The Bottom Line

RMDs can throw a wrench into account owner’s plans when it comes to taxes and distributions. Be mindful of the effects that these distributions can have on your situation.

What are your thoughts on required minimum distributions? Should they have a place in law, and how might they affect you?

Photo by Horia Varlan

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