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 various retirement accounts if you've been saving throughout your career. But transitioning from the "accumulation phase" to the "distribution phase" of retirement requires a special understanding of IRS rules, which include taking required minimum distributions (RMDs) based on your life expectancy.

When You Must Take Minimum Distributions

You can't lock up funds in a retirement account forever. The age at which you're obligated by law to begin taking RMDs depends on the type of retirement plan you use:

  • IRA: You're required to start taking RMDs from your IRA (including traditional, SEP, or SIMPLE) every year beginning no later than April 1 of the year following the year you reach age 70.5.
  • 401(k): You must begin taking RMDs from your 401(k), 403(b), or other defined contribution plan by April 1 following the later of the year you turn 70.5 or retire.

Then, you must take RMDs by December 31 in each subsequent year. The amount of your RMDs is based on your life expectancy.

Why Minimum Distributions Are Required

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

These incentives and benefits not only encourage people to save for retirement, but they also increase the overall growth of these retirement assets. But the Internal Revenue Service still wants its share of those dollars at some point in time.

RMDs ensure that the IRS will eventually get to tax the assets in your retirement accounts by requiring that you take distributions that are added to your taxable income each year. Your withdrawals less your basis (any contributions which you may have already paid taxes on) or any tax-free income (from Roth account distributions, for example) 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, however.

While Roth IRA owners don't have to take RMDs while they live, people who inherit these accounts do have to take them.

How to Figure Minimum Distributions

Many retirement plan custodians will provide your calculated RMD for you, but they're not required to do so. In any case, the math is straightforward enough that you can easily do it yourself. You can calculate your RMD amount by dividing the balance of all your qualified accounts as of December 31 of the previous 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 on this year's birthday. If your spouse is your sole beneficiary and is more than 10 years younger than you, you should use the Joint Life and Last Survivor Expectancy Table instead. For the calculation with the latter IRS life expectancy table, you would divide the balance of all qualified accounts by the life expectancy in the table at which your and your spouse's ages intersect.

Example Minimum Distributions Calculation

Let's assume you turned 70.5 and had a combined IRA and 401(k) balance of $274,000 on the last day of the year. As a single individual, you would use the distribution period found in the IRS Uniform Lifetime Table, which is 27.4, assuming you had not yet reached age 71 on the last day of the year.

Your required RMD would, therefore, be $10,000—that is, $274,000 divided by the distribution period of 27.4 in the RMD table. You would have until April 1 of the first year to take at least that amount, but you might not want to wait that long.

If, however, you turned 80 and had the same balance of $274,000, you would have to take an RMD of $14,652.41 based on the lower distribution period of 18.7 in the RMD table. As distribution periods decrease with age, RMDs tend to increase with age, especially when coupled with high retirement account balances.

Remember, these withdrawals are taxed in the year you make them, and the April 1 extension only applies to the year in which you reach age 70.5. When you celebrate your 71st birthday in the next year, you must take an RMD by December 31.

If you wait until the April of the year following your 70th birthday, you'll effectively have to take two RMDs that year, and this could bump up your taxable income considerably, resulting in paying more taxes in a given year. Many retirees take their first RMD by December 31 of the year in which they reach age 70.5 for this reason.

How to Take Minimum Distributions From Multiple Accounts 

If you own more than one IRA, you have to separately calculate the RMD for each account, but you can opt to take the combined RMDs from one or more accounts. For example, if you have to take a total of $10,000 in RMDs across your IRAs, you have the flexibility to take $5,000 from Account A and $5,000 from Account B. But RMDs must be calculated on and taken individually from any 401(k) or 457(b) plans that you have.

Penalties for Not Taking Minimum Distributions

The penalty for failing to take RMDs by the required deadline is significant—50% of the amount that you didn't take. Thus, older retirees, who often have higher RMDs, may stand to lose even more than their younger counterparts by not taking RMDs. 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.

The penalty might be waived, however, if you can establish that your failure to take a distribution was due to "reasonable error." You must be able to show that you're taking steps to rectify the situation. Attach a letter explaining the circumstances to Form 5329 when you submit it.

The Bottom Line

For most retirees, RMD rules have no special impact on how their retirement funds are used. Many begin taking withdrawals from their accounts as a means of retirement income before age 70.5. But you should know how to calculate the amount of your personal RMD using the IRS RMD tables to ensure that you're not at risk for the 50% penalty tax that's assessed if you don't take one on time.

Keep in mind that you can take more than the minimum required distribution if you don't mind the extra taxable income; you're not limited to your RMD. But you can't apply any additional funds you take to future years' RMDs. In addition, 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.