Required Minimum Distributions for Traditional IRAs

Saving as much as you can for retirement, as soon as you can, and as often as you can, is crucial to your financial well-being for when you finally exit the workforce. Suppose you have spent a lifetime contributing to a traditional Individual Retirement Account (IRA), and hope to leave your nest egg untouched for your heirs. The Internal Revenue Service (IRS) has certain requirements for you to follow concerning your IRA distributions once you reach a certain age.

At age 70½, or by April 1 of the year following the year you reach this age, the IRS mandates that you either empty the account in one lump-sum payment, or take required minimum distributions (RMDs). If you choose to take RMDs, ongoing distributions must be taken at the end of each following year. If your birthday is December 3, 2016 and you turn 70½ on June 3, 2017 you can wait until April 1 of the following year—2018—to take your first distribution. But, doing so can have tax consequences. In December 2018, you will be required to take your next distribution, which will raise your taxable income for the year, potentially boosting you into a higher tax bracket or even causing your Social Security benefits to be taxable.

The minimum withdrawal amount is calculated by dividing the amount of your account balance by the appropriate life expectancy factor, which depends on your age. The IRS Uniform Lifetime Table below illustrates the amounts for the majority of taxpayers, including individuals who are single, married with spouses 10 years younger or less, and married with spouses who are not the sole beneficiaries of the account and are more than 10 years older than the account owner.

Based on the table below, let’s suppose that if you are age 70 and your account is worth $500,000, then your RMD amount would be $18,248 ($500,000 divided by 27.4). Married individuals whose spouses are more than 10 years younger and are named as the sole beneficiaries of their accounts can use a joint life expectancy table to calculate their RMDs. Remember that a required minimum distribution is just that—a minimum—you can always take out more than the required minimum. However, if you fail to withdraw at least the minimum amount, the IRS may impose a 50% penalty each year on the dollar amount that you neglected to withdraw. Based on the example above, if you failed to take your RMD, the IRS could claim the amount of $9,124.

Distributions from your traditional IRA can be taken without penalty after you reach age 59½, but before you reach this age, a 10% tax penalty may be incurred on early withdrawals. There are some exceptions. Withdrawals taken for the purchase of a first home or for medical or higher education expenses may not be subject to the penalty. In addition, distributions taken in a series of substantially equal payments over your life or life expectancy may not incur a penalty.

You will work a lifetime to accrue enough savings to attain a desirable lifestyle in retirement. Be sure to consult your qualified financial and tax professionals before RMDs are due in order to determine appropriate choices that are consistent with your overall objectives.