Follow these five steps to calculate your RMD:
1. Determine the distribution year. The account balance used to compute the RMD is based on the balance in a person’s retirement account on December 31 of the previous tax year.
2. Calculate the account balance. Gather statements with information about the balances in retirement accounts. An exception is Roth IRAs, where withdrawals are tax free if an account has been open for at least five years. IRA accounts can be combined for the purposes of this calculation. In other words, account balances can be combined and the RMD taken from any one account or combination of accounts. The same is true if someone has multiple 403(b) plans (i.e., retirement savings plans for teachers, college professors, and other nonprofit sector employees). 403(b) plans cannot be combined with IRAs, however. In addition, distributions must be taken separately from individual 401(k) plan accounts (i.e., retirement savings plans at corporations for private sector employees), and 401(k)s cannot be combined for the purpose of taking RMDs.
3. Look up the life expectancy factor on which RMDs are based. It is based on your age at the end of each tax year. A copy of the IRS Retirement Plan Uniform Distribution Table can be found on the IRS Web site at www.irs.gov. Look for Publication 590 in the “Forms and Publications” section. This table is also available in the “Resources” section of the Rutgers Cooperative Extension “Money and Investing” Web site at http://njaes.rutgers.edu/money/ira-table.asp.
4. Divide the account balance by the life expectancy factor (divisor) in the Uniform Distribution Table. An example is that the life expectancy factor for a 70-year-old is 27.4. If a retiree has a $100,000 IRA balance the previous December 31, the RMD would be $3,649.64 ($100,000 divided by 27.4). For age 71, the divisor is 26.5, and the RMD would be $3,773.58 ($100,000 divided by 26.5). A separate table is used for married couples with more than a 10-year age difference between spouses.
5. Take the RMD. Retirees must make their RMD withdrawal by the end of the distribution year. For example, for investors who are age 72, the age-appropriate factor is 25.6. If a 72-year old had a balance of $100,000 in one or more IRAs on December 31, 2012, he or she would be required to withdraw at least $3,906.25 ($100,000 divided by 25.6) by December 31, 2013.
Retirees can always withdraw more than the RMD amount, however, as their living expenses require. Once the withdrawal is made, the money can be saved or spent. Caution should be taken, however, to avoid outliving invested assets.
After age 59½, retirement plan owners can withdraw as much money as they want from their tax-deferred accounts without having to pay a 10% penalty. Those withdrawals are optional. At age 70½, however, withdrawals become mandatory. The penalty for not withdrawing the proper amount is a very steep 50% of the amount that should have been withdrawn but wasn’t. For example, the penalty would be $1,000 for taxpayers who are supposed to withdraw $2,000. Distributions can be taken in any manner that an investor sees fit as long as the minimum RMD amount is withdrawn annually. Specific methods include small regular monthly amounts or large lump-sum withdrawals at the beginning or end of each tax year.
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