How is the RMD Calculated?
Required Minimum Distributions
As you may already know, an RMD is your required minimum distributions in retirement. When you reach age 70 1/2 and you have a Traditional, SEP, Simple IRA, etc., then it’s time to consider how your RMD will fit into how you withdraw funds from your retirement account. When you reach age 70 1/2, the IRS requires you take annual RMDs. You have to make, at the least, a minimum withdrawal from every IRA you have established. Now, you have to pay ordinary income taxes on your withdrawal. This excludes your Roth IRA since this account is pre-tax.
It’s very important that you make these withdrawals. Additionally, you need to withdraw the correct amount. Otherwise, you will owe a 50% federal penalty tax and still have to make the correct withdrawal.
So how is the RMD calculated? The way that it works is, your RMD is withdrawn on December 31 of each year. If this is your first required minimum distribution, then you can delay it until April 1 (of the year after the year you turn 70 1/2). However, this will result in you having to take out two minimum distributions during that year. It very important to note, the repercussions of delaying your RMD withdrawal make it a less appealing option.
Calculating Your RMD
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. The IRS has published this in three Tables in Publication 590, Individual Retirement Arrangements (IRAs).
There are three separate tables:
- The Joint and Last Survivor Table is used by an account owner whose sole beneficiary of the account is his or her spouse and is more than 10 years younger than the account owner.
- The Uniform Lifetime Table is used by account owners whose spouse is not the sole beneficiary or whose spouse is not more than 10 years younger.
- The Single Life Expectancy Table is used by a beneficiary of an account.