How to calculate your required minimum distributions (RMDs).
Some advance planning can help avoid costly mistakes.
If you are the owner of an IRA, 401(k), or other qualified retirement plan, there are three things you probably know about RMDs:
- That it stands for required minimum distributions.
- That you have to do something by the time you turn age 70½.
- That you could be in trouble with the IRS if you don't do it right.
Does that sum it up? If so, you’re not alone. RMDs are probably one of the least understood components of a retirement plan, and frankly, one that many of us don’t give much thought to until we have to.
A brief summary.
What are required minimum distributions? In a nutshell, they are the least amount of money that a person must withdraw from a retirement account each year, generally starting at age 70½. In general, RMD rules apply to the following plans:
- IRAs (traditional)
- SIMPLE IRAs
RMD rules do not apply to Roth IRAs—as long as the original owner remains alive. After that, a surviving spouse will need to include them in his or her calculations.
Let's get started.
To calculate RMDs on a retirement plan, take the end-of-year balance and divide it by a life expectancy factor determined by the IRS. These factors, or “Distribution Periods” as they are known, are based on your age and can be found online at www.irs.gov/publications/p590/indes.html.
Note: There are three tables to choose from, so be sure to select the one that applies to you. For the purposes of this article, lets use the Uniform Lifetime table:
|79||19.5||91||10.8||103||5.2||115 and over||1.9|
Using this table, you can see that a 70 year old taking RMDs for the first time would divide a $200,000 balance by 27.4.
If you want, you can always withdraw more than the minimum, but remember that you will pay regular income tax on any amount withdrawn. It's also important to know that RMDs are required to be calculated for every qualified retirement plan you own.
|IRA 1 (Wife–Age 70)||$200,000||27.4||$7,299.27|
|IRA 2 (Husband–Age 72)||$100,000||25.6||$3,906.25|
|401(k) (Husband–Age 72)||$300,000||25.6||$11,718.75|
As you might imagine, this can become an administrative nightmare, which explains why so many retirees consolidate their retirement plans before age 70.
While the IRS requires you to take your RMDs by the end of the calendar year, how you do it is completely up to you. Most plan administrators give you the option of monthly, quarterly, or annual withdrawals. IRA and 403(b) owners have the option of withdrawing their total RMD amount from one or more plans; however, 401(k) and 457(b) participants must withdraw their RMDs from each plan separately.
Check your work.
If you fail to take some, or all, of your RMDs, the amount not withdrawn will be subject to a 50% penalty tax. Given the hefty penalty, you may want to check your calculations with an accountant or tax specialist. You may also find it helpful to use any of the handy RMD calculators available online.
If you need help with your retirement income planning, a New York Life agent would be happy to get together with you for a free, no-obligation meeting. Click here to find an agent near you.
Neither New York Life Insurance Company nor its agents provide tax or legal advice. Please consult your own tax or legal advisor to find out more about the personal consequences of the general subject matter of this article.