The money in most retirement plans can't grow tax-deferred indefinitely. Generally, you must start to withdraw money by April 1 of the year after the year in which you attain age 70-1/2, and you must continue to withdraw money at least annually. Your withdrawals from a plan are generally referred to as "distributions." (Note that Roth IRAs are not subject to this mandatory withdrawal. In addition, you don't have to take distributions from your current employer's plan if you reach age 70-1/2 and are still working there, provided your plan allows this exception.)
Following the first distribution, each subsequent withdrawal must occur before December 31 of each year. If you fail to take the money out in a timely manner, or if you take out less than is required by the rules, you'll pay a 50% penalty tax on the difference between what should have been withdrawn and the actual withdrawal amount. And you must still withdraw the correct amount and pay the appropriate taxes.
The amounts that tax law says you must withdraw are called "required minimum distributions."
It is relatively easy to run afoul of the rules dictating required minimum distributions, since the minimums can be difficult to calculate. Your required minimum distribution affects all of your assets held in traditional IRAs, SEP-IRAs, SIMPLE IRAs, Keogh accounts, 401(k), 403(b), and other plans. You may withdraw more than the minimum in any given year, but you get no "credit" in future years for additional amounts taken in earlier years.
The minimum distribution that you must take is based on your life expectancy, or, if you choose, on the joint life expectancy (officially the "joint life and last survivor expectancy") of you and your beneficiary. The younger your beneficiary, the longer the joint life expectancy and the less you will be required to take from your retirement plans. (However, to prevent you from skirting the minimum distribution rules, there are limits to the life expectancy you can use for a beneficiary other than your spouse.)
Using joint life expectancy can substantially reduce the amount of the required minimum distribution from your retirement plans. For example, consider the case of a 70-year-old retiree who has a single life expectancy, under IRS tables, of 16 years. This person would be required to withdraw a minimum of 6.25% of the retirement plan assets that he or she held as of December 31 of the year he or she turned 70-1/2. On the other hand, a 70-year-old with a 66-year-old spouse who has been designated primary beneficiary of the retirement assets would have a joint life expectancy of 22.5 years, and would have to withdraw only 4.4% of the retirement plan assets.
To calculate your RMD for the first year, take your year-end retirement plan balance from the prior year and divide it by your life expectancy factor. There are two methods for calculating your RMD life expectancy factor.
The life expectancy guidelines and tables are contained in IRS Publication 590, Individual Retirement Arrangements, which you can order at no charge by calling the IRS Forms Distribution Center at 1-800-829-3676
For example, suppose that you had two IRAs—one containing $25,000 and the other holding $40,000. If your joint life expectancy was 22.5 years, the distribution from the first plan would be $1,111 ($25,000 divided by 22.5), and the distribution from the second would be $1,778 ($40,000 divided by 22.5). You could withdraw the total required distribution—$2,889—from either IRA. Note that Roth IRAs, created under the Taxpayer Relief Act of 1997, are not subject to required minimum distributions.
For a more detailed explanation of the required minimum distribution rules, refer to IRS Publication 590.
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