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How To Figure Out The Amount of Your IRA Required Minimum Distribution

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Personally, I absolutely love the I.R.S. website.

Why, you ask? It’s a selfish reason, I hate to admit. You see, the information on the website is often so complex that it needs an interpreter. This is job security for a financial planner. I could spend a lifetime answering questions just about IRAs!

So far this year, the most common question clients ask is, “How do I determine the minimum distribution from my IRA?”

You can figure it out on the I.R.S. website, but it can be really tough to navigate to the exact information you need. I’ll break the answer down for you.

When?

First of all, you don’t have to withdraw funds from your pre-tax IRA until you are 70½. Technically, the due date is the first day of April (not April 15) following the year in which you turn 70½. This is affectionately referred to as the “required beginning date.”  

Each year after that, you have until December 31 to make your required distributions.

How much?

You only have to withdraw funds based on your actuarial life expectancy each year. The I.R.S. has a table to estimate your life expectancy based on your current age.

There is a life expectancy "factor" based on the Uniform Table for IRA owners. Here is the one for individuals who aren’t married, are married and the spouse is close in age (not more than 10 years younger), or are married but have a split beneficiary (spouse not the sole recipient).

Table III (Uniform Lifetime) 

Age Life Expectancy Factor Age Life Expectancy Factor
70 27.4 93 9.6
71 26.5 94 9.1
72 25.6 95 8.6
73 24.7 96 8.1
74 23.8 97 7.6
75 22.9 98 7.1
76 22 99 6.7
77 21.2 100 6.3
78 20.3 101 5.9
79 19.5 102 5.5
80 18.7 103 5.2
81 17.9 104 4.9
82 17.1 105 4.5
83 16.3 106 4.2
84 15.5 107 3.9
85 14.8 108 3.7
86 14.1 109 3.4
87 13.4 110 3.1
88 12.7 111 2.9
89 12 112 2.6
90 11.4 113 2.4
91 10.8 114 2.1
92 10.2 115 and above 1.9

Source: IRS.gov

To determine your required minimum distribution, simply take the prior year-end balance of your IRA and divide by the factor (which is your life expectancy) to get the dollar amount you need to withdraw each year.

For example, if your balance was $100,000 on December 31, and you turned 70½ the following January, you’d need to take about $3,650 as your minimum distribution for your 70th year. $100,000 divided by 27.4 (the “factor” or “life expectancy” for a 70 year old)  = $3,649.

There is more than one table. Make sure you are using the correct one. If you are married and have a much younger spouse or you inherited an IRA, you have a different table (but the concept is the same). Check out IRS Publication 590-B.

Would you rather just call someone and ask or use a calculator?  You can.

  • Call your IRA provider or financial planner, and they can walk you through it.  
  • Check out Bankrate’s RMD calculator.

The good news is that your retirement plan provider is highly motivated to send you the correct distribution, so they are probably “on it.” They should contact you to make sure you are complying.

The bad news is that the penalties are steep if you don’t comply, so be proactive with your investment company to make the required withdrawal. There is a 50% penalty if you skip your distribution.

I also suggest not waiting until the end of the year to take your required distribution. Why leave a margin of error with such a costly penalty? Simply take your distribution by September 30 and you’ll be ahead of the game.

What if you don't need the distribution? What should you do with it?

  • Give to charity.

If you’ve planned well for retirement and find you don’t need the income from the distribution, consider making a Qualified Charitable Distribution with your required withdrawal. If you are over 70½, you can send your distribution (up to $100,000) directly to a qualified charity without having to receive a check first.

This can be an advantage for givers who don’t have a lot of other deductions on Schedule A of their tax return and therefore take the standard deduction. Otherwise, they can’t write off their charitable gifts. It also helps high-income givers who are subject to phase-out limitations to their itemized deductions (also known as Pease Limitations). Click here for more information.

  • Contribute to your grandchildren’s college saving accounts.

Consider taking your minimum distribution and, after paying income taxes, send the net amount to a 529 college savings plan for your grandchildren or other loved ones.

You don't necessarily get a tax deduction, unless you live in a state such as Utah that allows a state income tax deduction for 529 plans.

You do, however, get the satisfaction of knowing your contribution could eventually be taken out tax-free by your grandchild to use for qualified college expenses.

  • Fund your long-term care policy.

I have yet to see anyone jump up and down with excitement to set up a long-term care insurance policy. However, when a long-term illness hits, people are overjoyed to have coverage to help pay the bills.

If you don’t have this coverage, consider using your IRA distribution (after taxes are taken out) to fund an annual premium for a long-term care policy. There are hybrid policies now that have return of premium or can be used for multiple purposes.

Whatever you end up doing with your distribution, just make sure you take enough and make it on time.

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