How Much Do I Need to Withdraw From My IRA at Age 70?

A slew of rules govern IRAs and workplace retirement setups, such as 401(k), SEP and 403b plans, but there is one rule you definitely don't want to mess up: the required minimum distribution, or RMD. If you fail to withdraw the full amount of any of your required distributions, the tax penalty is 50 percent on the amount not withdrawn, plus interest. So, even before you hit your 70th birthday, get your RMD strategy in order.

Age of Accountability

A required minimum distribution is exactly as it sounds: the minimum amount you must take annually from your tax-sheltered retirement plan. For a traditional IRA -- and for all IRA-based workplace retirement plans, such as SEPs and SIMPLE IRAs -- you must take your first RMD the year you turn 70½.

Figuring the Amount

The first step in calculating your required minimum distribution is locating your IRA statement that provides the balance of your account Dec. 31 the year before you hit 70½. Then you divide that amount by your life expectancy, which is provided by the IRS in Table III of Publication 590. In fact, you can get some relatively easy-to-use worksheets to help your do your arithmetic in Publication 590 (see Resources). It's a bit more complicated if your spouse is more than 10 years younger and is the sole beneficiary of your IRA. Instead of using Table III to get your divisor, you can use Table II -- and you'll have a much smaller required minimum distribution.

Multiple IRAs

Before you reach required minimum distribution age, it will make everything a lot easier if you combine all your IRAs into one account. Here's why: You must calculate the RMD separately for each account you own. Now, after doing all that math, you are allowed to add all your RMDs together and take the total required distribution from a single IRA account. But if you live long enough and you maintain multiple accounts, you're going to wind up with multiple required distributions.

Distribution Responsibility

Although your IRA custodian may figure your required minimum distribution for you, the ultimate responsibility is yours -- and if you skip a required distribution or take out an insufficient amount, the penalty is all yours, too. For example, if you had a $100,000 IRA, your required distribution at age 70 is $3,650. If you took only a $1,650 distribution -- $2,000 short of your required amount -- the tax penalty would be to assess an additional 50 percent to the tax bite on $2,000, plus interest from the date you should have completed your required distribution.

Distribution Deadline

Although you must take a distribution for the year you turn 70½, that transaction does not have to be completed until April 1 of the following year. But be careful. For each subsequent year -- including the year of your April 1 deadline -- you must complete the distribution by Dec. 31. So, if you wait until April 1, 2012, for your 2011 required minimum distribution, you still must take your 2012 distribution by Dec. 31, 2012. By the way, both of those distributions would be reported on your 2012 tax return.

Mistakes Happen

If you skip a required distribution or make a mistake in figuring your distribution, you need to file Form 5329. If you made a legitimate error in figuring your distribution, send a letter explaining your mistake and the steps you are taking to remedy the shortfall. You might be able to get the penalty waived.

Additional Distributions

You can take more than the required distribution in any year. However, you can't apply any of the excess distribution against your required amount for subsequent years.

401(k) Differences

As long as you are working for the employer of record for your 401(k), 403b or 457 plan, you are not required to take distributions until the year of your retirement or the year you turn 70½, whichever comes last. In fact, if your employer allows you to rollover your IRA into your workplace plan, you can put off required minimum distributions on your retirement funds until you quit working. But if you do the opposite -- send all or a portion of your 401k assets into a rollover IRA -- you will be governed by IRA required minimum distribution rules and the age 70½ deadline.

No Conversions Allowed

Roth IRA accounts -- but not Roth 401(k) plans -- are exempt from required minimum distributions. Because Roth IRAs do not have required distributions, rolling over money from a workplace Roth 401(k) to an individual Roth IRA might be good strategy for you. However, you are not allowed to convert any required minimum distribution from a pre-tax retirement plan into a Roth IRA.