How to Determine Minimum IRA Distributions
When you contribute to an Individual Retirement Account (IRA), the earnings accumulate tax free until you start withdrawals. There is no requirement to withdraw funds from your IRA account until you reach 70 1/2 years old. Furthermore, the first withdrawal can be postponed until the year after you turn 70 1/2. There are substantial penalties if the minimum required amounts are not taken out of the IRA account.
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Instructions
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Begin taking IRA distributions during the year you turn 70 1/2 or wait to take a withdrawal by April 1st of the following year. If you take the first withdrawal in the following year, it does not postpone the required withdrawal for that year.
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Determine if you want to take the minimum distribution or a larger amount. If you take a larger distribution than the minimum required for a tax year, it does not reduce the minimum distribution computation for a subsequent year.
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Calculate the minimum distribution for the year in which you become 70 1/2 years old by using one of three tables shown in IRS PUB 590 (Table 3 is the one that will normally be used). The minimum distribution for the first year is determined by dividing the IRA account balance at the beginning of the year by 27.4. The divisor gets smaller in each subsequent year.
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Compute the minimum distribution for each IRA account that you own and add the amounts together to arrive at the total reportable amount. If you made nondeductible IRA contributions in any year, that will decrease the taxable IRA distribution.
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Tips & Warnings
Failure to withdraw at least the minimum distribution for any year will result in a 50 percent excise tax on the amount which is below the minimum requirement. The financial institution which holds your IRA account should alert you to the minimum distribution requirements.
