Minimum mandatory IRA withdrawals are formally known as required minimum distributions, or RMDs. As money is contributed to Individual Retirement Accounts on a pre-tax basis, the Internal Revenue Service requires that at least some of the money be withdrawn at retirement age, as it becomes taxable upon withdrawal. The amount of the RMD is determined using IRS formulas, and there are severe penalties if an RMD is not taken.
Age at Withdrawal
Required minimum distributions begin once you reach the age of 70 1/2, and continue every year thereafter. Specifically, your first RMD must be taken by April 1 of the year following the year you turn 70 1/2. However, if you wait until the year after you turn 70 1/2, you must take an additional distribution before December of the same year. While distributions can be taken without penalty beginning at age 59 1/2, they do not become mandatory until the age of 70 1/2.
Life Expectancy Tables and Account Value
The RMD is calculated by a formula using a combination of your account value and your life expectancy. Account value is determined as of the close of business on December 31, or the last business day of the year if that day falls on a weekend or holiday. This figure is reported to the IRS by financial services firms at the end of every year, and it is also provided for individual clients. Life expectancy is determined by using one of three IRS tables located in the appendix of IRS Publication 590. Table I (Single Life Expectancy) is used for beneficiaries of IRA accounts, while Table II (Joint Life and Last Survivor Expectancy) is used if your spouse is more than 10 years younger than you and is your only beneficiary. Table III (Uniform Lifetime) is used if your spouse is not both your only beneficiary and more than 10 years younger than you.
To determine your RMD, look up your life expectancy in the appropriate IRS table and divide your year-end account value by this figure. The result is the amount of your RMD for the current year. As your account value and life expectancy figures change from year-to-year, this calculation must be performed every year once you begin taking your RMDs.
Multiple IRA Accounts
The IRS mandates that you take an RMD based on your total account values and your life expectancy, not that you take a distribution from each individual account that you may have. Thus, if you have more than one IRA account, you can take a minimum distribution from each account per year, or you can compute one total RMD amount and take that from whichever IRA you choose.
Failure to take your RMD in any year will subject you to a penalty tax of 50 percent of the amount that you did not withdraw. This penalty persists for every year that you fail to take your RMD.
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