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To calculate your required minimum distribution for any year,
start with the value of all your IRAs aggregated
Dec. 31 of the previous year. Then divide it
by a predetermined life expectancy, which can
vary. The most usual life expectancy is that of
yourself and a hypothetical person 10 years your
junior. (Bankrate's
required minimum distribution calculator can
help you get started.)
There are two exceptions to this
rule. First, if your spouse is more than 10 years
your junior and is your primary beneficiary, the
divisor is the actual joint life expectancy of
you and your spouse. Second, with a BDA-IRA, you
start with your individual life expectancy for
the year in which you take the first distribution
and then reduce that number by one each year thereafter.
This is not quite the same as your actual life
expectancy, because every year you live, your
future life expectancy decreases by slightly less
than a year.
Baffled? You're not alone.
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Calculating RMDs under various scenarios |
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| Let's illustrate with some numbers. Assume we have a 70½-year-old, "Ned," taking a withdrawal from a $1 million IRA. |
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If we calculate his RMD under the general rule, the joint life expectancy of Ned and a 60-year-old is 27.4 years, making the RMD $36,496. |
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Instead, let's assume Ned has a spouse who is only 50. In that case, the joint life expectancy is 35.1 years, making the RMD only $28,490. |
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On the other hand, if Ned inherited the IRA from his brother, the first year's single-life expectancy is 16, creating an RMD of $62,500. |
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One more twist: As already mentioned,
you have the option of taking your first required minimum distribution the
year after you turn 70½. In that case,
to calculate your RMD for the second year, subtract
your first year's RMD from your IRA's Dec. 31
value. Otherwise, you are overstating your second
required minimum distribution -- it should be as if you had taken the first
distribution on time.
Withdrawing more than your RMD
As long as you are at least 59½, you can take
money out of your IRA penalty-free. Despite (and
sometimes because of) the high cost of withdrawing,
there are times when you may want to take out
more than the required minimum distribution or take it out before you are
required.
First, you may need the money in
your IRA to support yourself, particularly if
all of your savings and investments are in retirement
accounts. In this case, you don't have much choice
-- you put the money aside to support yourself
after retirement, so do so.
Second, those who retire before
age 70½ often find themselves in some very
low tax-paying years. That's because they're tapping
their taxable assets to support themselves. Because
most dividends and capital gains currently have
maximum federal tax rates of 15 percent, there
may be little tax liability relative to cash flow.
In that situation, some people find they can't
really use their deductions for property taxes,
charitable donations and the like, so they would
likely just take the standard deduction.
If you find yourself in that sort of low-tax situation, you might want to convert some of your IRA assets to a Roth IRA. This can provide taxable income to absorb deductions while moving future income off the tax grid.
Third, if you are at least 70½
this year (even if you won't be 70½ by
the end of the year), you can donate up to $100,000
directly from your IRA to charity. The donation
will count toward your required minimum distribution but will not increase
your income -- so therefore will not generate
taxes or a deduction. If you don't need your RMD
to live on, this is a great way to meet any charitable
obligation while likely lowering your tax bill.
At present, the ability to use this giving technique
expires at the end of 2007, so take advantage
of it while you can.
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