Making Sense of IRA Required Minimum Distributions

Written by: Mike Valles

Once you reach the age of 70 1/2, the law requires that you must begin to make distributions from your traditional IRA. The IRS established the laws governing IRA’s and 401ks, and IRA required minimum distributions must be made at this time, or penalties will have to be paid.

The laws dealing with distributions from a Roth IRA are different than those dealing with a traditional IRA. Since taxes have already been made on money put into a Roth IRA, there are no required distributions.

For a traditional IRA, the first withdrawal has to be made by April 1 of the year following the time when you turn 70 1/2. If you fail to meet this deadline and do not withdraw the full amount, then you will have to pay 50 percent of that year’s distribution amount in excise taxes. Also, any amount that you withdraw that is above that year’s portion, which is perfectly legal, does not count as part of the following year’s distribution. You will still have to withdraw the full required amount each year. Make sure, too, that you calculate and withdraw the right amount of funds from each of your traditional IRA’s.

When you calculate the amount of the distribution that needs to be made, you start with the amount that is in the account as of December 31 of the previous year. Any additional contributions made since then are not added to the formula, and any distributions after that date do not enter into the calculation.

The required distribution amount is based on the age of the individual receiving it, and the age of the spouse – if applicable. You will have to determine the distribution amount by first looking at the tables for it provided by the IRS. This document has several tables on it, and you will need to determine which one, based on your particular situation. Essentially, says DailyFinance, you are going to divide the amount in the IRA by the number of years you are expected to continue to live. A form for determining the distribution period for those who are owners with a spouse who is less than 10 years younger can also be found at this IRS webpage.

Using the information from the above page, you can calculate the following example. An owner who is 71 years old is expected, according to the chart, to live another 26.5 years. The calculation is made by taking the total amount in the account as of December 31st of the previous year, and dividing it by the above number. If there is a balance of $100,000 in the IRA, then you divide it by 26.5, and come up with $3,773.58. This amount is the required minimum distribution for this year. You can take out more if you want, but you must take out at least this much in order to satisfy the IRS and avoid the heavy penalty of 50 percent.

For an owner of the IRA who is 85 with a spouse less than ten years younger, there are another 14.8 years left, according to the chart. If there is $140,000 still in the IRA, as an example, then this is calculated by dividing $140,000 by 14.8, which equals IRA required minimum distributions for that year of $9459.46.


Making Sense of IRA Required Minimum Distributions

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