How to Calculate How Much Should Be Drawn From a 401(k)

by Mark Kennan

Once you have retired, you have the discretion to remove as much money as you want from your 401(k) plan each year. Until the year you turn 70 1/2 years old, you have the freedom to remove as much or as little as you want. However, starting in the year you turn 70 1/2, the Internal Revenue Service (IRS) requires that you remove a certain amount, calculated based on your age and the value of your account. If you do not withdraw the minimum amount, the IRS imposes a 50 percent penalty.

Figure your distribution period by using the appropriate table in the appendix of IRS Publication 590. The appendix contains three tables: the Single Life Expectancy Table, the Joint Life and Last Survivor Expectancy Table and the Uniform Lifetime Table. The Single Life Expectancy Table is used for a 401(k) you received as a beneficiary. The Joint and Last Survivor Expectancy Table is used when your spouse is at least 10 years younger than you. The Uniform Lifetime Table is used in all other circumstances.

Locate your age along the left-hand column of the appropriate table. Use your age as of the close of the year. If you use the Joint Life and Last Survivor Expectancy Table, you also need to find your spouse's age across the top column.

Find your life expectancy in the cell next to your age if you use the Single Life Expectancy Table or the Uniform Lifetime Table. If you use the Joint Life and Last Survivor Expectancy Table, the life expectancy is found in the cell at which the row for your age and the column for your spouse's age intersect. For example, if you are 84 and your spouse is 72, the life expectancy equals 16.7 years.

Divide the value of your 401(k) plan by your life expectancy to find the minimum amount you must draw from your 401(k) plan for the year. The relevant value of your 401(k) plan is the amount it was worth at the end of the prior year. Finishing this example, if your 401(k) plan was worth $1.2 million at the end of the prior year, you must withdraw $71,856.29 to avoid penalties.