Emily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors. Her background in education allows her to make complex financial top.
Emily Guy Birken ContributorEmily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors. Her background in education allows her to make complex financial top.
Written By Emily Guy Birken ContributorEmily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors. Her background in education allows her to make complex financial top.
Emily Guy Birken ContributorEmily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors. Her background in education allows her to make complex financial top.
Contributor Michael Adams Investing EditorMichael Adams is an investing editor. He's researched, written about and practiced investing for nearly two decades. As a writer, Michael has covered everything from stocks to cryptocurrency and ETFs for many of the world's major financial publicatio.
Michael Adams Investing EditorMichael Adams is an investing editor. He's researched, written about and practiced investing for nearly two decades. As a writer, Michael has covered everything from stocks to cryptocurrency and ETFs for many of the world's major financial publicatio.
Michael Adams Investing EditorMichael Adams is an investing editor. He's researched, written about and practiced investing for nearly two decades. As a writer, Michael has covered everything from stocks to cryptocurrency and ETFs for many of the world's major financial publicatio.
Michael Adams Investing EditorMichael Adams is an investing editor. He's researched, written about and practiced investing for nearly two decades. As a writer, Michael has covered everything from stocks to cryptocurrency and ETFs for many of the world's major financial publicatio.
Updated: Apr 16, 2021, 10:03am
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Tax-deferred retirement accounts can shelter your nest egg from Uncle Sam while you’re working. But eventually you have to pay income taxes on your retirement funds, which is why those pesky required minimum distributions (RMDs) kick in once you turn 72.
It’s critical to understand how to calculate the correct RMD amount every year because withdrawing a distribution that doesn’t meet IRS requirements can have serious tax consequences. Here’s what you need to know about calculating RMDs.
To calculate your RMD for this year, the first step is to determine the balance in each of your tax-deferred retirement accounts as of December 31 of the previous year. (Notably, Roth IRA balances, though not other Roth account balances, can be excluded because they’ve already been taxed.) Once you have your balances in hand, add them together and divide the total by your IRS life-expectancy factor.
What’s an IRS life-expectancy factor? This key RMD figure represents the number of years you are expected to live, according to actuarial calculations. Also referred to as a distribution period, it’s based on your current age. You can find your life-expectancy factor listed in the IRS Uniform Lifetime Table.
Here’s an example of a typical RMD calculation. Take Hannah, a single woman who is turning 72 in 2021. Her 401(k) had a balance of $250,000 on December 31, 2020. The Uniform Lifetime Table lists Hannah’s distribution period as 25.6 years. Dividing her balance by her distribution period gives her an RMD of $9,765.63. ($250,000 / 25.6 = $9,765.625, rounded up to $9,765.63).
You can always take larger distributions than the ones that result from the calculations above, but the minimum part of required minimum distribution tells you this is the smallest withdrawal you can make to meet IRS requirements. Unfortunately, you cannot use withdrawals above the minimum in one year to satisfy RMDs in future years.
The IRS levies serious penalties for taking an RMD that’s too small. If you take less than required, the IRS will take 50% of the difference between what you did withdraw and what you should have withdrawn. For instance, if Hannah were to withdraw only $7,000, the IRS would levy an excise tax of $1,382.81—half of $2,765.62, which is the difference between what she actually took and her required minimum distribution.
If you have multiple retirement accounts, you have to follow certain rules on how to withdraw your RMDs.
If you have multiple accounts from defined contribution plans, like several 401(k)s from different employers, you must calculate the specific RMD for each account and withdraw the correct amount from each. Your 401(k) plans and other defined contribution plans will often calculate your RMD for you, but to simplify things you may choose to consolidate your 401(k)s into one account or even roll your savings over into a single IRA.
If you have multiple IRAs, you can withdraw your total RMD amount from one IRA or a portion from each of your IRAs. Unlike defined contribution plans, you don’t have to take separate RMDs from each IRA.
Some RMDs are calculated a little differently than what is outlined above. Specifically, if you are married to a spouse who is more than 10 years younger than you or if you are the beneficiary of a retirement plan after the plan participant passes away, then you will use a different method for calculating your RMD.
If you are married to a spouse whose birthdate is within 10 years of your own, your RMDs will be calculated using the Uniform Lifetime Table, just as it is for single account holders. But married account holders with a spouse who is 10 or more years younger and whose spouse is named as the sole beneficiary must use IRS Joint Life and Last Survivor Expectancy Table to calculate the correct RMD.
The distribution period on the Joint Life and Last Survivor Expectancy Table is based on both spouses’ ages. For instance, if Frank is 74 and his wife Mary is 60, the Joint Life Table lists their combined distribution period as 26.6. If Frank’s IRA balance as of December 31 of last year is $400,000, his RMD is $15,037.59. This is substantially less than the $28,368.79 that the Uniform Lifetime Table would have him withdraw.
If a retirement account holder passes away without having taken the necessary RMD for the year, it is up to the inheritor to take an RMD to avoid the tax penalty. After that’s taken care of, you have slightly more flexibility on the timing of future withdrawals, assuming you withdraw all assets by December 31 of the 10th year following the original IRA holder’s death.
These withdrawals will be taxed as ordinary income unless they come from Roth accounts. In that case, they will not be taxed at all as long as the account holder first funded a Roth account at least five years before they died.
If you are the spouse or minor child of the original account holder, no more than 10 years younger than the original account holder or disabled or chronically ill, you have additional withdrawal options for your inherited retirement plan.
You can still choose to spread withdrawals over the course of 10 years. Or you can opt for a five-year distribution or lifetime distribution. (Note: When minor children reach their state’s age of majority—usually 18 or 21—they are required to liquidate the inherited account within 10 years.)
With five-year distribution, beneficiaries must withdraw the entirety of the retirement account’s assets by December 31 of the fifth anniversary of the account holder’s death. If multiple beneficiaries are named for a single account, they are required to use the five-year distribution rule if the original account holder died before beginning to take RMDs (that is, prior to reaching age 72).
For lifetime distribution, the beneficiary determines the RMD based on their age’s listing in the Single Life Expectancy Table. That is, unless the designated sole beneficiary is the spouse of the original account holder. In that case, the spouse can effectively become a new primary account holder and calculate RMDs using the Uniform Lifetime Table. However, if the spouse is not the sole beneficiary, they must use the Single Life Expectancy Table, using the age of the oldest beneficiary to calculate RMDs.
An RMD, or required minimum distribution, is the minimum amount you must withdraw from a qualified retirement account each year.
