What Every Retirement Saver Should Know About Required Minimum Distributions

You may be aware of the fact that contributing money to a tax-deferred retirement account, like a traditional IRA or a 401(k), means you get to put money aside before it is taxed. This reduces your current tax burden and gives you a great incentive to save for retirement.

Unfortunately, Uncle Sam will eventually want his cut of that money. That’s where required minimum distributions (RMDs) come in.

The good news is that you have until age 70½ before you have to worry about RMDs. But it’s still important to understand how RMDs work and what to expect before you get to that age milestone.

What is a required minimum distribution?

Deferring taxes is great for the taxpayer, but the IRS can’t afford for taxpayers to defer their taxes indefinitely. Individuals with tax-deferred retirement accounts have to actually withdraw money — and thereby pay taxes — or else those taxes will never get paid.

Everyone holding a 401(k) or IRA account (with the exception of Roth IRAs) must begin withdrawing money from those accounts during the year they reach age 70½. This ensures that account holders have enough time to allow their money to grow without permanently sheltering their money from federal taxes.

The IRS has established minimums that you must withdraw each year after reaching age 70½. If you fail to withdraw the proper RMD, you face a stiff penalty: The IRS will take 50 percent of the amount you should have withdrawn.

Calculating your RMD

It’s also important to note that you are responsible for calculating and withdrawing the correct RMD each year — and the calculations aren’t necessarily easy. Even if the custodian of your IRA or 401(k) does the math and paperwork for you, you are the responsible party in the IRS’s eyes.

So how do you figure out your RMD? You need to start with three pieces of information:

  1. Your date of birth.

  2. The balance of each tax-deferred account as of Dec. 31 of the year before the year in which you turn 70½.

This IRS distribution table calculates your life expectancy based on your age. The table gives you a number that corresponds to the number of years the IRS expects you to live.

For instance, let’s say a retiree was born on February 4, 1948, and will turn 70 in the first half of 2018. This retiree has a single IRA, with a balance of $250,000 at the end of 2017 (the calendar year before the year in which she turns 70½). To calculate her RMD, she’d look up her age (70) on the IRS distribution table to find the distribution period, which in this case is 27.4. She would then divide her IRA balance by the distribution period for her 2018 RMD:

IRA balance / Distribution Period = RMD

$250,000 / 27.4 = $9,214

To keep on the right side of Uncle Sam, she will need to withdraw a…

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