Minimum 401(k) withdrawal varies yearly

Dear Dr. Don,
What is the mandatory withdrawal on a 401(k) account at age 70½? Is it based on your income or the size of your 401(k)? Does it change every year?
-- Charles Checklist

Dear Charles,
There was a big change for the 2009 tax year. The Worker, Retiree and Employer Recovery Act of 2008 waives any required minimum distribution for the 2009 tax year. Any required minimum distribution for the 2008 tax year is not waived.

The IRS Web page "Retirement Plans FAQs regarding Required Minimum Distributions" lays out how the RMD amount is calculated:

Generally, a RMD is calculated for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that IRS publishes in Tables in Publication 590, Individual Retirement Arrangements (IRAs). There are three separate tables:

• 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 Table is used by a beneficiary of an account.

See the available worksheets to calculate required minimum distributions.

So, the RMD is based on the account valuation at year-end in the year prior and the appropriate life expectancy factor. It will vary year by year. Bankrate has an RMD calculator that will estimate the payment.

The idea behind RMDs is that the tax code gave you the opportunity to defer taxes in these accounts over your working career. That deferral isn't meant to last forever. At some point, the money needs to come out of the account so the piper can be paid.