How To Calculate The Yearly Required Minimum Distribution For A Traditional IRA

An individual retirement account provides an effective method to defer income taxes on earned income. The interest earned in a traditional IRA also grows tax-free until distributed. However, the owner of a traditional IRA must eventually begin to annually calculate and withdraw an amount referred to as a required minimum distribution.

Early retirement phase

After you reach age 59 1/2, you can withdraw funds from a traditional IRA without limitation or penalty. Since the earlier contributions were not originally taxed, you must pay income tax at the time of distribution. Earned interest is also not taxed until withdrawn, providing ample incentive to leave the funds in the account for as long as possible.

You may prefer to rely on sources of income other than your IRA during the earlier part of your retirement. A remaining balance in an IRA will continue to accumulate tax-deferred interest, even after you stop making contributions from your employment. Unlike a Roth IRA, a traditional IRA has a requirement that its owner must start receiving distributions by a designated age.

Life expectancy calculations   The first mandatory distribution is for the year in which you reach age 70 1/2. The Internal Revenue Service provides three life expectancy tables for the purpose of calculating the required annual withdrawal. One table is only for beneficiaries of inherited accounts. The two other tables differ in that one is used only if you have a spouse that is both 10 years younger than you and is also your sole beneficiary.

The tables provide a life expectancy factor based on your age. The account balance in your traditional IRA is then divided by the age factor to arrive at your required minimum distribution for the year. You are always free to withdraw more than the minimum amount if desired. It is only if you withdraw less than the minimum requirement that you are subject to a substantial penalty.

Avoiding penalties

The 50 percent excise tax penalty is assessed only to the extent that the required minimum distribution exceeds the amount actually withdrawn. If you withdraw more than the minimum for any year, the excess amount does not offset future distribution requirements. The required distribution for each year is calculated anew, based on the current account balance and remaining life expectancy.

Your withdrawal for the first year in which you have a required distribution must be completed by April 1 of the following year. For subsequent years, each minimum distribution must be withdrawn by December 31 of the applicable year. Contact an investment advisory firm for more valuable information on retirement accounts or any other aspect of financial planning. One company that can assist you with your planning is Vahanian & Associates Financial Planning Inc.