Required Minimum Distributions (RMD)

rmd-withdrawal-rules-retirement-income-penalty-fine-tax-ira-401k_largeDo you know how much you HAVE to take out of your traditional IRA each year?  If you are 70 years old or older (or if your parents are) then listen up!

The IRS requires you to take a minimum amount of your Individual Retirement Account (IRA) and/or 401k each year.  The logic is that you have saved money for retirement and the IRS has not received tax revenue on that money yet.  So once you turn 70.5 (why is it not 70?…probably some politician was about to turn 70 years old!) the IRS makes you take a required minimum amount out so that they can begin receiving their tax revenue.  They take the required minimum distribution (RMD) very serious by levying a 50% penalty if you forget!  That right…if you had to take $5,000 out and you forgot, you get the privilege of writing the IRS a check for $2,500!

So how do you calculate the RMD?  I regularly hear people say that they are confused by the calculation.  However, it is pretty simple once you understand what you are doing.

You take your IRA balance on last years 12/31 and divide it by the life expectancy/distribution factor in the IRS table (link below).  The result is the minimum you HAVE to remove from the account in that given year.

https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf 

Let’s look at an example:

You turned 70 years old on 5/1/2018 (born 5/1/1948).  You had $520,000 in your traditional IRA  at the end of last year.  It is now up to $600k because you worked with me and we grew your account.

Since you will celebrate your 70.5 Birthday this year on 11/1/2018 you have to take an RMD!  Since you turned 70 years old this calendar year, you will use 27.4 as your divisor (see link above).  Your numerator is your IRA account balance as 12/31/2017 ($520,000 in this example).

RMD = $520,000/27.4
RMD = $18,979 (notice I rounded up just to be safe).

In 2019 you will have to take the total of 12/31/2018 IRA balance/26.5.
In 2020 you will have to take the total of 12/31/2019 IRA balance/25.6. etc…

Note, there are a few special circumstances where this calculation is not applicable or you have the option to use a more favorable calculation.  A few examples: IRAs that you have inherited from someone else.  RMDs if your spouse is more than 10 years younger than you (and he/she is the only beneficiary).  Roth IRA’s.

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