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RMD Calculations For Your 401(k) or IRA

Calculating the Required Minimum Distribution, or RMD, from your 401(k) account or IRA accounts isn't as hard as it sounds. Don't let the terminology scare you. Once you know the basics, there really is nothing to it. However, if you prefer, there are several free RMD calculators available online, including a free IRS RMD calculator.

RMD Calculation Step 1:

First, figure out if you have to take a Required Minimum Distribution at all. The rule sounds complicated but if you break it down, it makes sense.

You must take your first RMD by April 1st in the year following the year in which you turn 70 1/2.

So, if you turn 70 1/2 during 2014, you have to take your first RMD by April 1, 2015.

To make it even easier, here is a cheat:

  • Birthday between January 1 and June 31, then you have to take your first RMD by April 1st of the year you turn 71. (You will be 70 1/2 during the same year as your 70th birthday.)
  • Birthday between July 1 and December 31, then you have to take your first RMD by April 1st of the year you turn 72. (You won't be 70 1/2 until the year following the year you turn 70 1/2.)
  • It does not matter whether your birthday is after April 1st, so if your birthday is between April 1st and June 31, you still have to take your RMD by April 1st of the year you turn 71, and if your birthday is between July and December you still have to take your RMD by April 1st the year you turn 72.

That's not so bad, right?

Here is how to make it even easier: Just take your first RMD by December 31 after you turn 70 1/2.

You see, you still have to take a Required Minimum Distribution for the year you turn 70 1/2 even though you don't have to PAY IT until April 1 of the year following. If you do wait then you will have to take TWO Required Minimum Distributions that year. You have to take one for year when you were 70 1/2 and you have to take another one for the year you turn 71 1/2.

So if your 70th birthday is on May 1, 2014, then you MUST take your first RMD by April 1st of 2015. But, you still have to take an RMD for 2014 because you turned 70 1/2 in 2014. You don't have to pay it until April 1, 2015, but you have to take it FOR 2014. Think of it like your income taxes. You have to do your income taxes by April 15 in the year following the year you made the income. In other words, you have to do your taxes for 2007 by April 15, 2014, but you are still paying taxes for 2007, not for 2014.

However, unlike your income taxes, the April date only happens ONE TIME regarding your qualified retirement accounts like your 401(k) or IRA. After the first RMD all of the others are due by December 31st (no extension to April). So, in our example above, you could wait until April 2015 to take your 2014 RMD, but then you would have to pay your 2015 RMD by December 31 of 2015 also. That is two RMDs (one by 4/1/2015 and one by 12/31/2015). Is it worth the headache just to wait four months? Keep reading and we'll see.

RMD Calculation step 2 - How Much?

This is the part that sounds complicated but isn't too bad once you know the rules. Don't forget, you can use a free reliable online RMD calculator to calculate your RMD amount. Or, if you have a financial professional, have them do it. That's one of the things you pay a financial advisor for.

Your RMD amount is the total value of your account on December 31 of the year before divided by your life expectancy figure.

So Part 1 is what value do we use to calculate the RMD? The answer is the value on December 31 last year. So, for your 2014 RMD you use whatever the value of your account was on 12/31/2013. Your end of year statement is perfect for this.

Part 2 is finding what the life expectancy figure is. First, off don't worry about where these numbers come from. It doesn't matter. The IRS says use this table, so you use this table. No need to over complicate things. The tables are in the appendix of Publication 590.

There are actually three tables:

  • You only use Table I for beneficiary calculations.
  • You use Table III unless your spouse is more than 10 years younger than you. (You can skip the next two statements.)
  • You use Table III if you have more than one beneficiary on your account. (You can skip the next statement.)
  • You use Table II ONLY if your spouse is the SOLE beneficiary AND is more than 10 years younger than you.

Now that you know what table to use, we just look up the number.

If you are using Table III then for age 70 it is 27.4 and for age 71 it is 26.5. Once you have the number you simply divide the balance in your account by that number.

For example, if you will turn 71 sometime during 2014 and you had $500,000 in your 401(k) or IRA on December 31, 2013, then your required minimum distribution or RMD is $500,000 / 26.5 = $18,867.92. That means you will have to withdraw that amount from your account.

That's it! In reality, whoever is administering your account should be helping you determine this number as well as whoever does your taxes, but calculating your own number allows you to both plan and double check the numbers you receive.

IRS PUBLICATION 590

Remember that you do not need to take required minimum distributions from Roth IRA accounts. This is one of the advantages of using a Roth IRA in your retirement planning. You have at least one account that you can leave alone while taking your income in the form of RMDs from other accounts like your 401k or traditional IRA.