Just another reason to end up old and crotchety—the IRS forces investors to start removing money from their traditional IRAs in the year after they hit 70.5 years. Why? The IRS allows you to deduct traditional IRA contributions from your taxable income. Because Uncle Sam never got his share of this cash, he wants to make sure he gets at least some of it before you die. Morbid, but true. The IRS helps you calculate your required minimum distribution (RMD), which is based on your age, account value and life expectancy.
Retrieve the latest statement for all of your traditional IRAs. The IRS requires that you take an RMD from each of your traditional IRAs if you have more than one. Locate the latest copy of IRS Publication 590 at IRS.gov.
Locate the account balance on your traditional IRA statement. Refer to Appendix C, Tables II and III in IRS Publication 590. Figuring your RMD can be a complicated proposition. The IRS uses different rules, guidelines and formulas based on several factors, particularly your age, your spouse's age and your beneficiary situation. Consult Publication 590 or your tax advisor to assess your situation and utilize the appropriate RMD formulas.
Find the appropriate life expectancy for your age in Appendix C of IRS Publication 590. Use Table III in Appendix C if you match any of these characteristics: You are unmarried, you are married and your spouse is not more than 10 years younger than you or you are married and your spouse is not the sole beneficiary of your IRA. In one of these cases, if you are 75 years old, your distribution period is 22.9 years, as of November 2010.
Divide your account value by your distribution period. Assuming an account value of $50,000 and a distribution period of 22.9 years, a 75-year old's RMD is $1,712, as of November 2010. If you are 75 years of age and your spouse is more than 10 years younger than you and your sole beneficiary, use Table II in Appendix C to determine your RMD. For the above example, your distribution period shifts to 27.2 years, assuming you are age 75 and your spouse is age 59. This makes your RMD $1,838 ($50,000 / 27.2).
- You must start taking an RMD every year, beginning in the year after you turn 70.5. For instance, if you hit 70.5 in 2011, the IRS requires that you receive your RMD by April 1, 2012. In all subsequent years, the IRS makes you take your RMD by December 31st.
- If you fail to take all or part of your RMD, the IRS levies a 50 percent excise tax on the amount you failed to withdraw from your traditional IRA, according to Publication 590.
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