The Internal Revenue Service (IRS) lets you put money into an IRA and defer taxes all through your career and even well into your retirement if you retire before age 70. But this situation doesn’t last forever with traditional IRAs. Eventually, you have to take out at least minimum amounts, known as required minimum distributions, or RMDs, from your account once you reach age 70 1/2.
Technically, that means the IRA money must start being withdrawn in specific increments no later than April 1 following the year you reach that age.
The exact distribution amount changes from year to year. It is calculated by dividing an account’s year-end value by the distribution period determined 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 other tables are 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)|
|92||10.2||115 and older||1.9|
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 by the distribution period value that matches your age on 12/31 each year. Every age beginning at 70 has a corresponding distribution period, meaning 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 18.7 years for an 80-year-old. Therefore, Joe must take out at least $5,348 this year ($100,000 divided by 18.7).
The distribution also decreases each year, so your RMDs will increase accordingly. That is because you are dividing the value of your IRA by smaller and smaller numbers, so the resulting number will be larger every year. 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 the traditional IRA, 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. In contrast, 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. In most years, the deadline is Dec. 31. 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 December 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.