The IRS requires IRA owners to begin taking taxable distributions from their IRAs after they turn 70 ½. Failure to do so can result in an IRS penalty equal to 50% of your Required Minimum Distribution amount (aka RMD).
To avoid this penalty you must take your RMD no later than April 1 of the year after the year you turn 70 ½. If you turned 70 ½ this year, then your first RMD is due no later than April 1, 2017.
Here’s an example.
The IRS says that IRA owners MUST begin taking Required Minimum Distributions no later than “April 1 of the year following the year” the IRA owner turns 70 ½.
*Bob’s 70th birthday was on January 15th 2016, and so turned 70 ½ on July 15th. Bob could take his first RMD this year — 2016.
If he wants to defer that RMD a little longer, Bob could wait until April 1 of 2017 – the year after the year he turned 70 ½ or April 1, 2017 in this example.
Either way, he must take his first IRA RMD no later than April 1, 2017 or pay a penalty.
Calculating your RMD.
The amount of your RMD is determined by your IRA account balance as of December 31 of the previous tax year. For Bob, in the example above, his RMD would be based on his 12.31.2015 account balance.
If you own 2 or more IRAs, be sure to add up the total of all the IRA balances to determine your aggregate 12.31.2015 IRA balance. You may take your entire IRA RMD out of just one IRA, but the RMD calculation is based on the total amount you have in ALL your IRAs.
Next, divide your 12.31.2015 IRA balance by 27.4. This number changes each year as you get older and is determined by the IRS Uniform Life Tables. You can find this table here.
Bob has one traditional IRA. His wife is about his age. The balance of his IRA on 12.31.2015 was $500,000. His RMD is calculated as follows:
12.31.2015 account balance / Life Expectancy as defined by the IRS Uniform Life Table.
$500,000 / 27.4 = $18,248.15
$18,248.15 must be distributed from his IRA before the end of 2016.
Since Bob turned 70 ½ this year, he can wait to take his taxable distribution until April 1 of 2017 if he chooses. Future IRA RMDs will need to be met by December 31.
The good news if you hate math
I showed you how to calculate your IRA RMD above. You should know how the math works so you can be sure your RMD is accurate. However, in most situations your IRA RMD will be calculated by your IRA custodian. It’s even possible to instruct them to initiate your RMD automatically each year, putting everything on autopilot so you never miss an RMD.
If you haven’t taken your 2016 IRA RMD or instructed your IRA custodian or financial advisor to do so before the end of the year, do it now. It rarely pays to wait, and a missed IRA RMD is an expensive mistake.
For more information
Bob’s case is as simple as it gets. You’ll learn in future posts that it’s not always this simple. In the meantime you can learn more about IRA distributions straight from the IRS by clicking here.
*This is a fictional person and example for the purposes of illustrating a point.