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The Internal Revenue Service (IRS) lets you put money into a traditional IRA and defer taxes on your contribution and any investment gains all through your career. But this situation doesn’t last forever. Eventually, you have to take out minimum amounts annually, known as required minimum distributions, or RMDs, from your account once you reach age 72. RMDs also apply to employer-sponsored retirement accounts such as 401(k) and 403(b) plans.
Technically, that means the RMD must start being withdrawn no later than April 1 following the year you reach that age.
How much do you need to withdraw? The exact distribution amount changes from year to year and is based on your life expectancy. It is calculated by dividing an account’s year-end value by the estimated remaining years of your lifetime, in a table provided by the IRS.
The table shown below is the Uniform Lifetime Table, the most commonly used of three life-expectancy charts that help retirement account holders figure mandatory distributions. The IRA has other tables for beneficiaries of retirement funds and account holders who have much younger spouses.
IRA required minimum distribution (RMD) table
|Age of retiree||Distribution period (in years)||Age of retiree||Distribution period (in years)|
|95||8.9||120 and older||2.0|
Source: Internal Revenue Service (IRS)
How to calculate required minimum distribution for an IRA
To calculate your required minimum distribution, simply divide the year-end value of your IRA or retirement account by the distribution period value that matches your age on Dec. 31st each year. Every age beginning at 72 has a corresponding distribution period, so you must calculate your RMD every year.
For example, Joe Retiree, who is age 80, a widower and whose IRA was worth $100,000 at the end of last year, would use the Uniform Lifetime Table. It indicates a distribution period of 20.2 years for an 80-year-old. Therefore, Joe must take out at least $4,950.50 this year ($100,000 divided by 20.2).
The distribution period (or life expectancy) also decreases each year, so your RMDs will increase accordingly. The distribution table tries to match the life expectancy of someone with their remaining IRA assets. So as life expectancy declines, the percentage of your assets that must be withdrawn increases.
If you need further help calculating your RMD, you can also use Bankrate’s required minimum distribution calculator.
RMDs allow the government to tax money that’s been protected in a retirement account, potentially for decades. After such a long period of compounding, the government wants to be sure that it eventually gets its cut in a clear timeframe. However, RMDs do not apply to Roth IRAs, because contributions are made with income that has already been taxed.
Penalty for missing the RMD deadline
Keep in mind that it is your responsibility to ensure you take the full RMD amount by the deadline:
- The first time you take an RMD, you’ll have until April 1 of the year following the year you turn 72 to do so.
- After that, you generally have until Dec. 31 of the current year to take that year’s RMD.
If you haven’t withdrawn the full RMD amount by the deadline, any money not withdrawn is taxed at 50 percent. In such cases, the IRA owner must fill out IRS Form 5329. See Part IX of this form for the section regarding the additional tax on excess contributions.
Note that if you feel you’ve missed the deadline for a legitimate reason, you can request a waiver from the IRS. For more information, see the waiver of tax for reasonable cause section of the Form 5329 instructions.
SECURE Act changes to RMD rules
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, applies to plans beginning after Dec. 31, 2019. This change applies to those whose 70th birthday is July 1, 2019 or later. For those individuals, the first RMD moved from age 70 1/2 to age 72. For those who turned 70 1/2 before July 1, 2019, the first RMD remains at age 70 1/2.
However, RMD rules may soon be changing again, if pending legislation ends up being enacted. The Securing a Strong Retirement Act of 2022, passed by the House of Representatives in March 2022, would extend the start of RMDs beyond age 72 on a gradual basis moving forward:
- For those who reach age 72 after Dec. 31, 2022 and age 73 before Jan. 1, 2030, the RMD age would be 73.
- For those who reach 73 after Dec. 31, 2029 and age 74 before Jan. 1, 2033, the RMD age would be 74.
- For those who reach 74 after Dec. 31, 2032, the RMD age would be 75.
The Senate is working on bills that could have a similar effect, and both sides of Congress are planning to create a unified version that could be included in legislation by the end of 2022.