The Formula for RMD Disbursements

by D. Laverne O'Neal, studioD

One of the downsides of owning a traditional IRA is that at age 70 1/2, you must begin withdrawing funds. The Internal Revenue Service mandates that IRA owners begin taking required minimum distributions, or RMDs, at that age. According to Smart Money, Congress devised the concept of required minimum distributions so that the IRS could begin collecting tax revenues "sooner rather than later."

RMD Formula

In 2001, the Internal Revenue Service eliminated a maze of RMD formula choices in favor of a simple equation. To determine the amount of the required minimum distribution for a given year, divide the IRA balance at the end of the previous year by the figure corresponding to your age on the life expectancy table that applies to your situation. If you are single or your spouse is younger than you by 10 years or less, use the Uniform Lifetime Table (all tables are published on the website and in the print version of IRS Publication 590). Also, you must use this table if your spouse is not your sole IRA beneficiary. If your spouse is more than 10 years your junior, you use the Joint and Last Survivor Table. IRA beneficiaries base figures on the Single Life Expectancy Table. For example, you are single, age 72 and your IRA balance at the end of the previous year was $100,000. Your RMD equation is 100,000 divided by 25.6 which equals $3,906.25.

Multiple IRA Accounts

If you own more than one IRA, you have to perform the RMD calculation for each one. However, you can make the required withdrawal from just one account if you wish. For example, you own two IRAs. You calculate the RMD for each using the applicable life expectancy table and then add the two figures together. The result is your RMD – you can withdraw the full amount from just one of the accounts.

RMD Omission Ramifications

Although your IRA custodian typically calculates the RMD and must report the amount to the IRS, it is your responsibility under the law to figure the amount. Leaving it up to the custodian may be tempting, but the consequences are stiff if the RMD amount is not distributed in a timely manner. The IRS will tax the amount you failed to withdraw at a rate of 50 percent. As the account holder, you must file Form 5329 to report the oversight at tax time.

Penalty Waiver

If you fail to take your required minimum withdrawal in a timely manner, you may be able to have the penalty waived. Attach an explanation of the circumstances surrounding the oversight to Form 5329 when you file your tax return.

About the Author

D. Laverne O'Neal, an Ivy League graduate, published her first article in 1997. A former theater, dance and music critic for such publications as the "Oakland Tribune" and Gannett Newspapers, she started her Web-writing career during the dot-com heyday. O'Neal also translates and edits French and Spanish. Her strongest interests are the performing arts, design, food, health, personal finance and personal growth.

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