Traditional IRA 70 1/2 Withdrawal Rules
Individuals with traditional IRA accounts are required to withdraw annually at least a minimum amount after the IRA owner reaches the age of 70 1/2. The purpose of the rule is to force traditional IRA owners to start making withdrawals and to pay taxes on the amounts withdrawn. If the minimum withdrawal is not made, the IRA owner will be liable for additional tax penalties.
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Starting Age
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A traditional IRA owner must start taking the Required Minimum Distribution, or RMD, for the year she turns age 70 1/2. The first RMD does not have to be withdrawn from the IRA until April 1st of the year following the year the IRA owner turned age 70 1/2. For subsequent years, the RMD must be withdrawn from the account by the end of the calendar year.
Calculating the Distribution
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The minimum required distribution is calculated on the IRA account balance at the end of the previous year for which the distribution is taken. The first RMD is based on the IRA amount at the end of the year that was prior to the year the IRA owner turned age 70 1/2. The distribution amount is based on the life expectancy of the IRA holder, or joint-life expectancy of the IRA owner and spouse beneficiary. There are three different charts based on age used to determine the life expectancy and minimum distribution.
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Example Calculation
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A traditional IRA owner turned 70 1/2 in the first six months of 2010 and must take the first distribution by April 1st of 2011. At the end of 2009, the IRA account was worth $200,000. The IRA owner turns age 71 by the end of 2010, so that age will be used for the distribution. From the IRS' Uniform Lifetime Table, a person age 71 has a life expectancy of 26.5 years. Divide the $200,000 by 26.5 to get the RMD of $7,547.
Minimum Distribution Considerations
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An IRA owner with several IRAs must calculate the RMD for each IRA account, but can make the total withdrawal from just one account if desired. If a distribution is taken for an amount greater than the minimum RMD, it does not reduce the amount for the next year's RMD. If an RMD is not withdrawn, not withdrawn in time, or not the correct amount withdrawn, the tax penalty is 50 percent of the amount that should have been withdrawn.
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