Minimum Required Distributions
There are two important ages for investors who use IRA accounts or employer plans such as 401k's:
- 59 1/2
- 70 1/2
At age 59 1/2 you will be able to start withdrawing from your retirement plans. IRA accounts will generally be the easiest to take distributions. You can take out any amount and it will be taxed as ordinary income. Employer plans that are active (you're still contributing to) may be more restrictive. You may only allowed partial withdrawals.
Once you reach 70 1/2 the IRS requires you to start taking withdrawals from your retirement accounts. These distributions are called MRD's and apply to all of your retirement accounts including Traditional IRA's, Rollover IRA's, SEP Plans and 401k plans or 403b plans you may be using.
Balances in your IRA's are added together to determine your minimum withdrawal, but you can select one IRA account to take the withdrawal.
You will also have to take minimum distributions from defined contribution plans such as profit sharing, 401k plans and 403b plans. These employer plans will have the same rules. However, these plans are more restrictive and every plan has different rules on distributions. It's generally easier to do a direct rollover into an IRA for simple distributions.
You are not required to take MRD's from a Roth IRA.
Required Beginning Date
You'll have until April 1st of the year following the calendar year you turn 70 1/2 to take the your first annual MRD, however you'll be taking two distributions that year, potentially paying more taxes. So most investors take their first MRD by Dec 31 of the year of their 70 1/2 birthday.
Taxation
Your MRD withdrawals will be taxed as ordinary income for the tax year in which they're taken. They are also subject to state and local taxes. Any non-deductible or after tax contributions are not taxed as they are withdrawn. These contributions should be tracked by IRS form 8606. Each year, the withdrawals and any tax withholding from your IRA or employer plan will be reported on the IRS Form 1099-R.
The IRS will require your custodian to withold 10% of your MRD for prepayment of taxes. You can elect not to have these taxes withheld or to have taxes withheld at a rate greater than 10%.
MRD Calculation
The IRS recently revised their life expectancy tables for the MRD and created the Uniform Lifetime Table. It is for single and married savers.
A retirement saver will simply divide their account balances as of Dec 31 by the longevity factor on the Uniform Lifetime Table. This calculation will change each year based on the size of your account and the new life expectancy calculation.
Remember you'll do this calculation each year. Your IRA provider should be able to do these calculations easily and set up automatic distributions for you each year.
Retirement Planning Table
Uniform Lifetime Table
Age of Account Owner / Divisor
70 / 27.4
71 26.4
72 25.6
73 24.7
74 23.8
78 22.9
76 22.0
77 21.2
78 20.3
79 19.5
80 18.7
81 17.9
82 17.1
83 16.3
84 15.5
85 14.8
86 14.1
87 13.4
88 12.7
89 12.0
90 11.4