Required Minimum Distributions—Pay up! Or Don’t.
By Paul Hynes, CFP®
You’re retired, enjoying the freedom, and living the life. If you’ve also reached the ripe old age of 70, then it’s time to pay up—in this case, to the IRS.
If you have any type of retirement account, such as an IRA, then you can’t keep all of your funds in the retirement account indefinitely. Generally, you have to start taking out at least a minimal amount when you reach age 70. This amount is called the “Required Minimum Distribution,” or RMD. Note that RMDs don’t apply to ROTH IRAs.
The amount you take out will be added to your income for the year, and will likely be taxable. That means you’ll be paying your taxes to the IRS and State tax collectors.
The first year for RMD’s is the year you turn 70 1/2.* So, if your birthday falls before July 1, then it’s the year you turn 70. If your birthday falls after July 1, it’s the year you turn 71. After that, you’ll continue to take out an RMD each and every year.
The formula for calculating your RMD is fairly simple. First, add up the total value of all of your retirement account balances as of December 31st the prior year. Then divide that balance by your remaining life expectancy, per the IRS Uniform Lifetime Table. The result is your RMD for that year.
For example, let’s say you have $100,000 in retirement accounts on December 31, 2018. At age 70, the IRS table says you should expect to live another 27.4 years. You divide the dollar amount by the years and arrive at $3,649.64. That’s your RMD amount—a little less than 4% of the total.