August 8, 2014 in Retirement

Over the years, your traditional IRA and 401(k) helped you reach retirement savings goals faster by allowing earnings to benefit from tax-deferred growth.

But eventually, Uncle Sam wants his share.

Regardless of financial need, the Internal Revenue Service generally requires owners of traditional IRAs, 401(k) plans, simplified employee pensions, or SEPs, and SIMPLE accounts to begin taking minimum distributions (and paying the resulting tax) by April 1 of the year after they reach age 70 1/2.

Each year thereafter, your required minimum distribution, or RMD, is due by Dec. 31.

(Note that if you wait until April 1 to take your initial distribution for the previous year, you’ll still be required to take a distribution by Dec. 31 for the current year, which results in a double tax bill.)

Even if you began receiving distributions before age 70 1/2, you must calculate and receive the RMD by the required beginning date.

Determining how much you need to take is not necessarily difficult, but it does demand accuracy.


Failure to take those distributions, or take a large enough amount, results in a 50 percent excise tax on the amount not distributed.

“Some people are not even aware that they have to begin distributions at 70 1/2 and the penalty is very severe,” says Bill Bengen, a Certified Financial Planner and author of “Conserving Client Portfolios During Retirement.”

Two steps to your RMD

  • Determine the combined balance in your qualified tax-deferred plans as of Dec. 31 of the previous year.
  • Divide that balance by the applicable distribution period provided by the IRS.

Doing the math

To figure your RMD, determine the combined balance in your qualified tax-deferred plans (IRA, 401(k), etc.) as of Dec. 31 of the previous year.

Next, divide that balance by the applicable distribution period provided by the IRS.

The IRS has three tables within Publication 590 to help you determine your distribution period.

Table I is for use by the traditional IRA’s beneficiaries and surviving spouse.


Table II is for IRA owners whose spouse is the sole designated beneficiary and more than 10 years younger.

Table III, the “Uniform Lifetime” table, is the most commonly used. Use it if you are either unmarried, or you are the IRA owner and your spouse is not your sole designated beneficiary and not more than 10 years younger than you.

So, for example, a 74-year-old man using Table III would get a distribution period of 23.8 years. If his account balance was $50,000 on Dec. 31, 2013, he would have to divide $50,000 by 23.8, giving him an RMD of $2,100.84 for 2014.

Note that if you receive more than your RMD in any given year, you will not receive credit for the additional amount when determining distributions for future years.

Use Bankrate’s calculator to figure your minimum IRA withdrawal.

A lot saved?

Be aware, too, that if your account balances are big enough, your RMDs could bump you into a higher tax bracket.

Because there are no income limits on a conversion, you might consider converting your traditional IRA to a Roth retirement account, which eliminates the need to take required minimum distributions.

Once you reach age 70 1/2, you are not allowed to roll over amounts that must be distributed in any given year, but you can roll over the rest of your IRA to avoid required distributions in the future. (You’ll owe tax on any amount you roll over.)