If you don’t take your minimum IRA withdrawals when required, there is a 50% federal tax penalty on the difference between the amount you actually withdrew and the amount that you should have withdrawn. Moreover, you will need to withdraw the required minimum and pay tax due on the taxable amount of that withdrawal. You can determine the taxable amount of your RMD by using IRS Form 8606.
The RMD must generally be withdrawn by December 31 of each year. This can be in a lump sum or in installments during the year.
If it is your first RMD year, you can delay withdrawing until April 1 of the year after the year you turn age 70½. If you use that delay, you will end up taking two minimum distributions during that calendar year. This could put you in a higher tax bracket for that year, so be careful.
Of course, the RMD rules do not apply to a Roth IRA because you have already paid the taxes that are owed.
Estimating Your RMD Amounts in Retirement
The RMD amount is calculated applying an IRS life expectancy factor to your account balance at the end of the year. The life expectancy factor can be found in IRS Publication 8606. Thus, to calculate your RMD you: (1) Find your age in the table; (2) Find the corresponding life expectancy factor; and (3) Divide your IRA balance as of the end of the previous year by the life expectancy factor.
Vanguard provides a helpful online calculator for estimating required minimum distributions from an IRA when you retire. It can be used to estimate the withdrawal amount and the account balance, based on your age, your spouse’s age if applicable, starting balance, projected rate of return, and beneficiary type.
If you have more than one retirement plan (such as multiple IRAs or a 401(k), you have to separately calculate the RMD for each plan. You are allowed to add the RMD amounts of all IRAs and then withdraw the total RMD amount from any one (or more than one) of your IRAs. These rules also apply to 403(b) accounts.
Final Thoughts on RMD Planning
In my opinion, it is not too early for baby boomers to think about how they will be funding their retirement all the way through. This means being careful about taxes and knowing which retirement accounts should be used for withdrawals and different points in time. If you have an IRA or other plan, I would start studying the required minimum distribution rules now.
Image credit: Jack Black’s stunt double