IRA RMD Explained

By: Clay Wyatt

Whew! You've passed age 59 ½ and are finally done with the seemingly endless rules that are associated with your IRA. Now, you can do whatever you want with that money. But wait - not so fast. Once you turn 70 ½ or retire, whichever is later, Uncle Sam starts pulling some strings again.

Any money that remains in your IRA is subject to an annual required minimum distribution (RMD). You must take an IRA RMD by April 1st of the year following the date you turn 70 ½ or retire and then by December 31st of each year for the rest of your life, including the year in which you take your IRA RMD by April 1st. So, you would technically have two IRA RMD payments in the first year after you turned 70 ½ or retired if you waited until April 1st of the following year, but the first payment would actually cover the previous year, so it would equal out to 1 IRA RMD payment per year.

How do you calculate your IRA RMD? This depends on your situation. You must take the value of your IRA as of December 31st of the previous year and divide it by an IRS provided life expectancy factor. The life expectancy factor depends on your situation. Here is how it all breaks down:

If you are age 70 ½ or older, your spouse is the sole beneficiary of your IRA, and your spouse is over 10 years younger than you, complete this form to determine your IRA RMD.
For all other IRA owners, use this form to determine your IRA RMD.

In either case, a bit of relatively simple math is required and it shouldn't take too long to calculate how much your IRA RMD will be.

What happens if you do not withdraw your IRA RMD properly? The IRS will impose a 50 percent penalty and withhold the taxes that would have been due anyway. So, let's say you have $250,000 left in your IRA at age 73 and decide to roll the dice and not take your IRA RMD that year. Then, the IRS finds out you skipped your IRA RMD and hits you with a 50 percent penalty. Under current IRS rules, you would have had to take out $10,121.46 ($250,000/current life expectancy factor of 24.7 for someone age 73). Now that the IRS has found out, you not only still have to take that money out, but you just forfeited $5,060.79 (50 percent) of the money that you would have otherwise had. It may not be fair, but by overlooking your IRA RMD you will likely suffer significant financial losses.

If you have more than one IRA account, you must calculate the RMD for each account. However, you may take the RMD from any combination of IRA accounts. For example, let's say you have 3 IRA accounts. You calculate the IRA RMD for each and they come out to the following:

Account A's IRA RMD is $8,000
Account B's IRA RMD is $7,000
Account C's IRA RMD is $12,000

Now, assume you just love how Account C is performing and would like to leave it alone. You could take the total RMD of $27,000 from just Account A, just Account B, or a combination of both. As long as the full IRA RMD amount is taken, it doesn't matter which account is comes from.

On a final note, remember that all of this only pertains to the required minimum distribution. You are free to take out more than that amount. However, with all the rules and regulations that are involved, it is best to seek the assistance of a retirement financial planner. Think of doing so as insurance against Uncle Sam paying an unwelcome visit!