Tax Experts
Figuring Required IRA Withdrawals
Use this formula to calculate how much your required minimum distribution from an IRA will need to be.
By Kevin McCormally, Editorial Director, Kiplinger.com
January 31, 2007
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At 70½ years of age one is required to take a certain minimum distribution from an IRA from then on. How is this amount calculated?
The first required minimum distribution (RMD) is due by April 1 of the year after the year you reach age 70½. After that, each year's RMD is due by December 31. If you turned 70½ in 2006 and postpone the 2006 contribution until 2007, for example, you'll wind up taking (and being taxed on) two RMDs this year because the 2007 payout is due by December 31.
Now, for how to calculate the required payout. Let's figure an RMD for 2006.
First, you find the balance in your IRA as of December 31, 2005. If you have more than one traditional IRA, you find the combined balance in all of your accounts. (A 2007 RMD is based on the December 31, 2006 balance.)
Then, divide that amount by a factor based on your life expectancy found in a table published by the IRS. Most taxpayers use the Uniform Lifetime Table published in IRS Publication 590. If you were 70 on your birthday in 2006, for example, the factor is 27.4. If you were 71 on your birthday in 2006, the factor is 26.5. It continues to decline as you get older.
Let's assume you had $100,000 in your IRA (or IRAs) at the end of 2005 and turned 70 in the first half of 2006 and thus must take a distribution for 2006. Dividing $100,000 by 27.4 would tell you that your RMD for 2006 is $3,650.
If you withdraw at least that much between January 1, 2006, and April 1, 2007, you meet the mandatory payout requirement for 2006.
If you are married and your wife is more than ten years younger than you are, you use a different table in Publication 590 that has larger divisors and therefore requires smaller payouts.
Remember, you can take out more than your RMD. If you fail to take out enough, though, one of the toughest penalties in the law applies: 50% of the amount you should have taken but didn't.
See last week's question and answer.
