What’s the Minimal Distribution for an IRA?

When you contribute to an IRA, the IRS allows you to defer paying taxes until when you withdraw money in retirement. Once you attain age 72, you are required to start taking the required minimum distributions from your IRA. You will pay taxes on your contributions when you withdraw money from your account.

Required Minimum Distribution (RMD) is the minimum amount of money you must withdraw from an IRA when you reach 72. The first distribution must be taken by 4/1 of the year after you turned 72, and in subsequent years, you must take RMDs by December 31. The RMDs you take are calculated based on your age and account value by Dec 31 of the preceding year.

What are minimum distributions for an IRA?

Minimum distributions refer to the distributions that taxpayers must withdraw from their tax-advantaged retirement accounts such as traditional IRA. You must take RMDs from your account in the year after you turn age 72, and it also applies to employer-sponsored retirement plans like 401(k) and 403(b). You must take distributions from the retirement account by April 1 of the following year after you turn 72.

The amount you need to withdraw varies each year, and it is calculated based on your life expectancy. The actual distribution amount is determined by dividing the IRA’s end-year value by the number of years of your lifetime. The IRS provides a worksheet, which is known as a Uniform Lifetime Table (PDF) to help retirees calculate the amount they need to withdraw. The plan administrator must calculate the exact distributions and report these withdrawals to the IRS.

How to Calculate RMDs for an IRA

When calculating the required minimum distributions you must take from an IRA, you should make sure you are using the correct IRS worksheet. Apart from the Uniform Lifetime Table, you may need to use different tables for different situations

Your RMD is calculated using two main variables i.e. the account balance and your age. Follow these steps to know the exact distribution you will take.

Step 1: Write down your account value- the balance of your account at the end of the previous calendar year.

Step 2: Check the distribution factor listed on the IRS worksheet that matches your age in the current year. This number ranges from 27.4 to 1.9, and it decreases as the account owner gets older.

Step 3: Divide the account value by the distribution factor from the IRS table. For example, if your balance is $600,000 and the distribution factor is 24.7 (assuming you are 73 and you are using the Uniform Lifetime Table), you will need to take an RMD of $24,291.50.

Taking RMDs from Multiple Retirement Accounts

If you have multiple retirement accounts such as a traditional IRA and 401(k), the IRS requires that you must calculate minimum distributions from each account separately. This means that, once you turn 72, you are required to take RMDs from each tax-advantaged account. However, the IRS also allows taxpayers to combine the RMDs and withdraw the total distributions from just one account.

For example, if you need to withdraw an RMD of $15,000 RMD from your 401(k), and $7,000 from your traditional IRA, you don’t have to withdraw these distributions from each corresponding account. Instead, you can withdraw the total $22,000 RMD from either the 401(k) or the traditional IRA during the year.

What happens if you don’t take RMD or withdraw too little?

The IRS requires taxpayers to take the first RMD by April 1 of the following year after your turn 72, and after that, you must take RMDs each year by Dec 31.

If you don't withdraw the RMD amount by the deadline or withdraw an amount below the required minimum distribution, you will pay a 50% penalty for any amounts not withdrawn. You will be taxed for the difference between the distribution you took and the distributions you were to take that year.

If you don’t have an urgent need, you can take RMD distributions in several increments throughout the year, as long as you withdraw the expected distribution by December 31 of each year. If you missed taking the full distribution due to a valid reason, you can apply for a waiver from the IRS.

Taking RMDs from Inherited IRAs

If you inherit an IRA, the following RMD rules will apply to the inherited IRA

Spouse inherits traditional IRA

If you are a spouse of the deceased account owner, you have more options with the inherited retirement assets. You can decide to leave the inherited assets in the IRA, rollover the inherited assets into your IRA, or rollover the assets into an inherited IRA.

If you move the assets to your IRA, you can take minimum distributions when you turn 72 based on your age and life expectancy. If you leave the money in the IRA and the spouse was already 72, you can start taking RMDs the following year after the spouse’s death. If the spouse was below 72, you delay taking RMDs until when your spouse would have been 72.

Non-spouse inherits traditional IRA

Non-spouse beneficiaries such as children, relatives, and friends are required to take the full payout from the IRA by the 10th anniversary of the account owner’s death. Minors who are below 18 won't need to take distributions until they attain the age of maturity when they would be required to withdraw all inherited assets within 10 years.