How To Calculate Minimum Required Distributions From An IRA?

Answer 1

The IRS gives investors a pretty good deal with IRAs. The IRS will let you defer taxes on anything you put into an IRA but at some point they're going to want their money. That's why they created the minimum required distribution. Based on your age and the balance in your accounts, there is a minimum amount that needs to be withdrawn from your IRA every year once you reach age 70 ½. Otherwise, you'll incur a penalty.

The rules around calculating your minimum required distribution can get a little hairy so if you're unsure or need a little help you might want to consult an accountant. If you're ready to tackle it yourself, read on.

First, to calculate your RMD you'll need to consider that balance in ALL of your IRA accounts for the end of the previous year. For example, if you're calculating your minimum distribution for 2011, you'll need to look at the total IRA balance as of the end of 2010. The IRS doesn't care about individual accounts; just all the money you have under the IRA umbrella.

Second, grab a copy of IRS Publication 590. This will give you the government's life expectancy tables. You'll need to know – for IRA distribution purposes at least – how long the government expects you to live.

Now, you're ready to calculate. Take your total IRA balance at the end of the previous year and divide it by your life expectancy. As an example, if you have a total balance of $1 million dollars and you have a life expectancy of 17.4 years, your minimum required distribution will be $57,471. Next year, you'll do it all over again with a new balance number and a new life expectancy.

Keep in mind that minimum required distributions do not apply for Roth IRA accounts. Generally speaking, you'll need to make a required minimum distribution from all other retirement accounts.