The Formula for Taking a Disbursement From an IRA

by Craig Woodman

Individual retirement arrangement (IRA) accounts are a good way to save money towards retirement while taking advantage of tax breaks to help your money grow. Since IRAs are tax deferred accounts, they come with specific rules about when you are allowed to withdraw funds, as well as when you must begin withdrawing money from your account. Following these rules will allow you to avoid unnecessary tax penalties.

Minimum Withdrawals

When a taxpayer reaches age 70 1/2, he must begin taking mandatory minimum disbursements from traditional IRA accounts that he owns, and begin paying taxes on the withdrawals. The minimum amount to withdraw is based on the age of the account owner, as well as the life expectancy of the owner based on IRS tables. Divide the balance of the IRA by the life expectancy of the owner. For example, the life expectancy of a 76 year old is 22 years. If a 76 year old has an IRA balance of $600,000, he would have to withdraw $27,272 for the year from his IRA.

Substantially Equal Payments

Generally, taxpayers under 59 1/2 years of age must pay a 10 percent tax penalty on any traditional IRA withdrawals, in addition to the taxes on the withdrawal as normal income. A younger tax payer can bypass the penalty by taking substantially equal disbursements over a period of at least five years, or until the taxpayer reaches age 59 1/2.

Calculating Substantially Equal Payments

The life expectancy tables for this calculation are in IRS publication 590. A taxpayer who is 45 has a life expectancy of 38.8 years according to the single life expectancy table. Divide the balance of the account by the life expectancy to determine the allowable withdrawals as a substantially equal payment. If he has an IRA balance of $1,000,000, he must withdraw $25,773. The next year, the balance would be divided by his life expectancy for his new age. Once you begin taking substantially equal withdrawals, you must continue for at least five years, or until you turn 59 1/2.

Other Disbursements

You can withdraw Roth IRA contributions at any time without taxes or penalties, and you do not have to begin withdrawing from a Roth IRA at any particular time. You can withdraw up to $10,000 from an IRA penalty-free for the purchase of a first time home. Money can also be withdrawn from an IRA penalty free in case of the disability of the account owner, or to pay for the college expenses of a member of the owner's immediate family. Excess medical expenses that are over 7.5 percent of a person's adjusted gross income may also be withdrawn penalty free. Taxes would still be due on these traditional IRA withdrawals.

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