If you have a traditional Individual Retirement Account (IRA) that you have been contributing to so that you have a source of funds after you reach retirement age, then you need to know how to read an IRA RMD Table. This is important because not everyone receives the same required minimum distribution (RMD) from their IRA accounts. The amount you receive is going to be based on your account balance and the number of years you are expected to live once you reach the minimum distribution age.
Before you jump over to the IRS site to access an IRA RMD Table, you should understand the rules that govern IRA RMDs. They are quite simple, but they are also very important, since if you do not make your RMD every year, you will have to pay a significant tax on the amount you do not withdraw. You are not in the business of providing the IRS with extra money, so be sure to read up on the rules below to ensure you don’t give them more than they already get.
IRA RMD Rules:
With a traditional IRA, you are not required to begin taking distributions until you turn 70 1/2 years old. You can begin taking money out when you are 59 1/2 years old without incurring an early withdrawal penalty of 10 percent, but you do not HAVE to start taking out money until you reach 70 1/2. Once you reach that age, you must choose when you will receive your distributions.
Most of the time, you will receive your first RMD by April 1 of the year following the year you attain the age of 70 1/2. So, if you turn 70 1/2 in August of 2013, you will be required to take your first RMD by April 1, 2014. After your first distribution, though, you can choose when you receive it. For instance, you might decide you need a little extra money each month, so you decide you will receive your RMD in 12 equal amounts throughout the year. Or, you might choose to receive your RMD in one lump sum in December to help pay for the holidays. Either way, you must receive your full RMD by December 31 of each year, after your first RMD.
If you take more than your RMD one year, you are not able to take less than your RMD the following year. The minimum is the minimum and it cannot be changed by taking more or less the year before. It is also important to note that your IRA could be subject to temporary rule changes by the IRS. For example, in 2009, traditional IRAs received an RMD waiver. This meant that for that year only, participants did not have to take an RMD.
The reason the IRS instituted RMDs is so that retirees would have a steady source of income that ideally would run out at the time of death. This is also why life expectancy is directly involved in the calculation of your RMD. The goal is for you, the retiree, to use all of the funds you set aside for retirement for that purpose. If these rules were not in place, it is likely that many retirees would use the money for their heirs following their death. This still happens frequently, but because of the RMDs, more retirees are using the funds to ensure they are comfortable in their retirement.
Moreover, in an additional effort to encourage retirees to use their funds for retirement, the IRS will penalize you for not taking the RMDs by the deadline each year. The penalty is 50 percent of the amount you do not withdrawal that is under the RMD for your age and IRA balance as determined by the IRA RMD table.
Using an IRA RMD Table:
When you get close to 70 1/2 years old, or even earlier, you are going to want to calculate your RMD so you can plan your retirement. You will need to access the correct IRA RMD Table for your situation. This is because there are different RMDs for different recipients. A RMD worksheet can be found here to help you calculate how much you are going to be required to take out of your account when you reach the magic age. If you have named your spouse the beneficiary of your account and your spouse is ten or more years younger than you, access your worksheet here. If your spouse is not ten or more years younger than you or you have named someone other than your spouse as a beneficiary, access your worksheet here.
You will need to calculate your RMD for each IRA you have, since each one will likely have a different balance. You can then total all of your RMDs and take your full distribution from a single account if you prefer. Here are the steps for calculating your RMD:
- Determine the balance of your IRA as of December 31 the previous year. Enter it on line 1 of the worksheet.
- Find your age on the IRA RMD Table and enter your distribution period on line 2 of the worksheet.
- Divide the amount on line 1 by the number you entered on line 2. Enter this amount on line 3. This is your RMD for your IRA account.
Here is an example:
An IRA owner is calculating his RMD for the first year he is required to take RMDs. He will be 71 on his next birthday, which falls before he is required to take his first RMD on April 1. His IRA balance is $100,000.
- Balance of IRA as of December 31 last year: $100,000
- Age 71, distribution period: 26.5
- Line 1 amount divided by 26.5: $3,773.58
In this example, the IRA owner, whose wife is not younger than him by ten or more years, would be required to take $3,773.58 out of his IRA this year. The RMD will change each year as he gets older, but will be based on a smaller balance each year as well.
Not every IRA has an RMD attached to it. For example, Roth IRAs do not require that you take out a minimum amount every year. However, beneficiaries of a Roth IRA will need to take out RMDs once the original owner passes away. If you are unsure about your RMDs or whether or not you even have to take them, consult an investment expert who can help you sort it all out.
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