Mandatory IRA Withdrawals: The Rules of Required Minimum Distribution (RMD)

To help taxpayers save for retirement, the IRS offers a number of tax advantages for individual retirement accounts (IRAs). These accounts delay taxation on your contributions and investment gains until you make withdrawals during retirement. The IRA only delays taxation, it is not a tax-free account. To prevent taxpayers from leaving money in their IRAs and delaying taxation indefinitely, the IRS requires withdrawals to begin once the owner turns 70 1/2. If you do not withdraw your annual required minimum distribution (RMD), the IRS charges you an excise tax of 50 percent of what your RMD should have been.

Instructions

1. Look up what year you turn 70 1/2. Your first RMD is due by April 1 the year after you turn 70 1/2. If you turn 70 1/2 in June 2012, your first RMD is due by April 1 2013.

2. Determine which life expectancy table to use for your RMD calculation. These tables are on the IRS website. If you are single, use the Single Life Expectancy Table. If you are married and your spouse is not more than 10 years younger, use the Uniform Lifetime Table. If you are married and your spouse is greater than 10 years younger, use the Joint and Last Survivor Table.

3. Look up your life expectancy at age 70 on your correct table.

4. Divide your current IRA balance by your life expectancy at age 70. This calculates your first RMD. For example, if you have $100,000 in your IRA and your single life expectancy at 70 is 17 years, your RMD is $100,000/17 = $5,882. You need to take out at least $5,882 from your IRA to avoid the excise penalty.

5. Report your RMD withdrawal as income on IRS Form 1099R. Include this form with your tax return.

6. Repeat this calculation every following year to calculate your future RMDs. Your subsequent RMDs must be made by December 31 for each year after you turn 71. Note that the IRS updates the life expectancy charts, so make sure to use the most up-to-date table for your calculation.

Tips & Warnings

• RMDs only apply to traditional IRAs. Roth IRAs do not have RMDs because you have already paid taxes on the money and withdrawals are tax free.

• Double-check your calculation with a financial adviser. Miscalculating your RMD can result in a costly tax penalty.

References

• Internal Revenue Service: Retirement Plans FAQs regarding Required Minimum Distributions
• Internal Revenue Service: Traditional IRAs