How to Figure Required Minimum Distributions Based on Life Expectancy

Learn how to use RMD tables to figure your required minimum distributions

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You probably understand the tax advantages of retirement accounts if you've been saving throughout your career. But moving from the "accumulation phase" to the "distribution phase" requires an understanding of IRS rules. These rules include taking required minimum distributions (RMDs) based on your life expectancy.

Key Takeaways

  • Required minimum distributions (RMDs) are withdrawals that you must take from your IRA or 401(k) after you reach a certain age.
  • RMDs ensure that the IRS receives its tax money. They prevent the tax advantages of these accounts from being passed on to your heirs.
  • You're not required to take RMDs from Roth IRAs.

When You Must Take Minimum Distributions

The age at which you must begin taking RMDs depends on the type of plan you use. You must start taking RMDs from your IRA (including traditional, SEP, or SIMPLE IRAs) each year beginning no later than April 1 of the year following the year you reach age 72. You must begin taking RMDs from your 401(k), 403(b), or other defined contribution plan by April 1 following the year you turn 72 or the year you retire.

You must then take RMDs by December 31 in each of the next years. The amount you have to withdraw is based on your life expectancy.

Why RMDs Are Required

RMD rules exist because of the tax benefits of qualified retirement plans. Traditional IRAs, 401(k)s, and SEP IRAs offer tax deductions for contributions you make, up to a limit. They also offer tax-deferred growth of the contributions' earnings. 

These benefits encourage people to save for their golden years. They help increase growth by investing the money that should have gone to taxes. But the IRS will still get its share of those dollars at some point.

RMDs ensure that the IRS can tax the assets in your retirement accounts by making you take distributions and adding them to your taxable income each year. Your withdrawals, less any contributions on which you may have already paid taxes, are included in your taxable income for the year you take them.

These rules apply to all employer-sponsored plans, along with Roth 401(k) plans, but not Roth IRAs. Inherited Roth IRAs do have minimum distribution requirements.

Roth IRA owners don't have to take RMDs while they live, but those who inherit these accounts must take them.

How to Figure Minimum Distributions

Many retirement plan custodians will calculate your RMD for you. They're not required to do so, but the math is simple enough that you can do it yourself. You can figure your RMD amount by dividing the balance of all your qualified accounts as of December 31 of the prior tax year by a distribution period based on your life expectancy.

Look up the distribution period in the IRS Uniform Lifetime Table next to your age as of this year's birthday. Use the Joint Life and Last Survivor Expectancy Table instead if your spouse is your sole beneficiary and is more than 10 years younger than you.

Divide the balance of all qualified accounts by the life expectancy in the table at which your and your spouse's ages intersect.

An Example Calculation

Let's assume you've turned age 72. You have a combined IRA and 401(k) balance of $274,000 on the last day of the year. You would use the distribution period found in the IRS Uniform Lifetime Table, which is 27.4, if you're a single person.

Your RMD would be $10,000: $274,000 divided by the distribution period of 27.4 in the RMD table. You would have until April 1 of the next year to take at least that amount. You would have to take an RMD of $14,652.40 based on the lower period of 18.7 in the RMD table if you turned 80 and had the same balance of $274,000.

Distribution periods decrease with age. This makes RMDs increase with age when they're coupled with high account balances.

When to Pay the Taxes

The IRS taxes these withdrawals in the year you take them. The April 1 extension only applies to the year after which you reach age 72. You must take an RMD by April 1 of the next year when you celebrate your 72nd birthday. It helps to take the money before Dec. 31 of the year you turn 72. You'll more or less have to take two RMDs that year if you wait until April 1 of the year following your 72nd birthday.

This could bump up your taxable income a great deal, so you'd pay more taxes in a given year. Many retirees take their first RMDs by Dec. 31 of the year in which they reach age 72 for this reason.

How to Take RMDs From Multiple Accounts 

You must figure out the RMD for each account if you own more than one IRA. You can then combine these amounts.

You can take combined RMDs from one or more accounts. You can take $5,000 from Account A and $5,000 from Account B if you have to take a total of $10,000 in RMDs across your IRAs. But RMDs must be calculated on and taken individually from any 401(k) or 457(b) plans that you have.

Penalties for Not Taking Distributions

The penalty for failing to take RMDs is harsh. It's 50% of the amount you didn't take. Older retirees who have higher RMDs may lose even more than younger persons if they don't take RMDs.

The IRS does allow for mistakes, as long as you can show it truly was a mistake.

The penalty might be waived if you can establish that your failure to take an RMD was due to a "reasonable error." You must be able to show that you're taking steps to fix the matter.

You must also file IRS Form 5329, "Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts," along with your tax return for that year. Attach a letter to Form 5329, explaining the circumstances of your reasonable error, when you submit it.

The Bottom Line

RMD rules have no real impact on how most retirees' retirement funds are used. Many begin taking money from their accounts as a means of income before age 72. But you should know how to figure the amount of your RMD using the IRS RMD tables to make sure that you're not at risk for that 50% penalty tax if you don't take one on time.

You can take more than the minimum required distribution if you don't mind the extra taxable income. You're not limited to just taking your RMD. But you can't apply or roll over any extra funds you take to future years' RMDs.

You don't have to spend the money you take. You can reinvest it in another type of account that isn't tax-deferred, such as a savings account or a taxable brokerage account.