In some circumstances, Internal Revenue Service (IRS) rules mandate that individual retirement account (IRA) owners take required minimum distributions (RMDs). The formula for determining RMDs is based on the account owner's life expectancy and the value of the IRA.
The IRS requires all IRA beneficiaries to take RMDs. Traditional IRA owners must also begin taking RMDs the year they turn 70 1/2. RMDs are designed to limit the effectiveness of IRAs as tax shelters, because they gradually draw money out of the account.
RMD are calculated by dividing the account's worth on December 31 of the previous year by the account owner's life expectancy according to the applicable IRS life expectancy tables. For example, Mr. Smith owns a traditional IRA that is worth $50,000 on December 31, 2009. In 2010 he turns 70 1/2; according to the IRS, he can expect to live for 27.4 years. His RMD, which he must take by December 31, 2010, is $50,000 divided by 27.4, which equals $1824.82
When determining life expectancy for the purposes of calculating the RMD, it is important to use the right life expectancy table. There is one for IRA owners with spouses at least 10 years younger than themselves; one for owners with spouses less than 10 years younger; and third for IRA beneficiaries.
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