March 5, 2012

Figure Your IRA Required Minimum Distributions

If you have a traditional IRA then you may be required to take what are called Required Minimum Distributions (RMD).   An RMD is required once you hit 70 1/2 years old.   The basic idea here is that the government wants you to 'live a little' and spend some of that money before you pass away (because they want the taxes).    So the laws require that you start withdrawing money once you hit 70.5.    Note :  The RMD rule does not apply to a Roth IRA.

When you hit 70.5 years old the RMDs are required.   The amount of the RMA is based on your age and the amount in the IRA.   You have to take out a certain % of the funds each year and the amount changes.    The RMD will be taxed as normal income.

Avoid 50% penalty
Taking the RMD is required and if you fail to make minimum withdrawal  required then you may have to pay a 50% excise tax on the amount you failed to distribute.   Its far better to take the withdrawal as required and pay regular income tax than to pay a 50% penalty tax.

When do they start?

The IRS says: "you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½."

How much is it?

The IRS says: "Figure your required minimum distribution for each year by dividing the IRA account balance ...as of the close of business on December 31 of the preceding year by the applicable distribution period or life expectancy."

The account balance in your IRA is based on the amount in the account after market closes on December 31st.   That is a fixed amount and won't fluctuate cause business has closed.   You need to look at the amount at the end of the year and not any other date.   This should be straight forward enough.  Just look at the account balance on December 31st at 6PM.   Example:   On December 31st of 2011 after 5PM your IRA balance was $56,000 then that is the account balance you use for your 2012 distribution.

The amount of the RMD is basically based on your age.  Simply put they take your balance and divide it by your life expectancy.  So for example if you're 76 years old your life expectancy is 22 years so they expect you to withdraw 1/ 22 th of the money that year.      Every year you age your life expectancy goes down by a little less than 1 year.   So the actual amount you have to withdrawal goes up as a % of your holdings.  The life expectancy values are based on tables defined by the IRS.   You have to use the IRS tables. 

The IRS tables are in the appendix of pub. 590.

Table I = used for people who inherit a IRA
Table II = used for married couples who are more than 10 years apart in age
Table III = single people and married couples less than 10 years apart.

Here are the values from Table III

Age  Factor %
70 27.4 3.65%
71 26.5 3.77%
72 25.6 3.91%
73 24.7 4.05%
74 23.8 4.20%
75 22.9 4.37%
76 22 4.55%
77 21.2 4.72%
78 20.3 4.93%
79 19.5 5.13%
80 18.7 5.35%
81 17.9 5.59%
82 17.1 5.85%
83 16.3 6.13%
84 15.5 6.45%
85 14.8 6.76%
86 14.1 7.09%
87 13.4 7.46%
88 12.7 7.87%
89 12 8.33%
90 11.4 8.77%
91 10.8 9.26%
92 10.2 9.80%
93 9.6 10.42%
94 9.1 10.99%
95 8.6 11.63%

Over age 95 it keeps going up until you hit a max for age 115.

Example :    Bob is 79 years old and single.  He has $56,000 in his IRA.      The RMD is 1/ 19.5 of the value so he has to withdraw 56000 / 19.5 = $2,871.79.

Example 2 :   Roy and Cindy are married.   Roy is 71 and Cindy is 70.   They have to take RMD from Roy's IRA.  He has $428,000 in the IRA right now.  The minimum withdrawal is 428,000 / 26.5 = $16,150.94

Here are the basic steps to figure your RMD every year: 

1. Are you older than 70.5 years old?  If so then proceed to step 2.  If not then you don't have to do an RMD
2.  Take your IRA balance at the end of the day on Dec. 31st. 
3. Look up your life expectancy value from the tables in the appendix of pub. 590
4. Divide the IRA balance from step 2 by the life expectancy factor in step 3.   This is the RMD value.


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