Life Expectancy and Required Minimum Distributions

How Your Life Expectancy Impacts Your Required Minimum Distributions (RMDs)

Required Minimum Distributions
Required Minimum Distributions begin at age 70 1/2. Stockbyte/Getty Images

Starting on April 1st of the year following the year you reach 70½, you are obligated by law to begin taking your Required Minimum Distribution (RMD) from your 401(k), traditional IRA, or other qualified retirement plan every year. This minimum amount is calculated based upon the beginning balance of your combined qualified accounts as of the start of the tax year divided by your life expectancy.

The Required Minimum Distribution Rules

Required minimum distribution (RMD) rules exist because of the tax benefits provided by qualified retirement plans.

Those qualified plans like 401(k) plans, traditional IRAs, and SEP IRAs all offer tax deductions on the contributions make (up to a limit) as well as tax-deferred growth on the contributions earnings. These incentives and benefits not only encourage people to save for retirement today, but also make exponentially increase the overall growth on those retirement assets for tomorrow. But, eventually, the IRS will want its share of those dollars.

That's where RMD rules come in. RMDs essentially ensure that the IRS will eventually get to tax the assets in your retirement accounts by requiring that you take distributions that will be added to your taxable income each year. For most retirees, RMD rules have no special impact on how their retirement funds are used, as most retirees start making withdrawals from their account(s) as a means of retirement income before age 70½. But to ensure that you will not be at risk for the steep 50% penalty tax assessed if an RMD isn't taken in time, you'll need to know the amount of your personal RMD.

How Required Minimum Distributions are Calculated

Your personal required minimum distribution (RMD) is calculated based upon the beginning balance of all of your qualified retirement accounts combined and you life expectancy. Though many plan custodians will provide your calculated RMD for you, they are not required to, so it is best if you are able to calculate it yourself.

To calculate your RMD for a certain year, you will take the account balances of all of your qualified retirement accounts (401(k), traditional IRA, SEP IRA, SIMPLE IRA, etc.) on December 31st of the previous year and add them together. Then, you will simply divide that total by your life expectancy factor. How do you find your life expectancy factor? You must consult the IRS Uniform Lifetime Table.

Let's assume a single individual turned 70 1/2 in 2015 and had a combined IRA balance of $274,000 on the last day of 2015. As a single individual, this person will use the distribution factor found in IRS Publication 590. The distribution factor will be 27.4 assuming they would still be 70 on the last day of 2015. Therefore, the 2015 RMD is $10,000 ($274,000 / 27.4), and they would have until April 1st to distribute at least that amount. You can calculate the amount of your RMD by using the RMD worksheets found on the IRS website.

IRA Required Minimum Distribution Worksheet

IRS Uniform Life Expectancy Table

To determine your life expectancy factor, the IRS created the following Uniform Life Expectancy Table. Unless your spouse is your sole beneficiary and is more than 10 years younger than you, this is the table to use That said, if your spouse is ten or more years younger than you, use the joint and survivor tables instead.

Uniform Lifetime Table 
Your AgeYour Life Expectancy