Calculating your RMD for your 401k / Traditional IRA

In the first year you turn 70 ½ you must take a required minimum distribution from your 401k or traditional IRA.   The IRS page that explains this in detail can be found here http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions [1]

When to start taking out

My father-in-law turned 73 this year and has not yet taken his RMD this year from his account.  I wanted to take this time to research when and how much he needs to take out so I can be better help to him in advising him about his finances.

Normally you can take your RMD anytime of the year, but you must take it by December 31^st.    The one exception is the year in which you turn 70 1/2, for that year you can delay taking it until April 1^st of the next year.  

As an example my mother-in-law turns 70 ½ in 2014.  She can take her RMD anytime between 1/1/2014 - 4/1/2015.     The next RMD for her  must be taking between 1/1/2015 and 12/31/2015.

What happens if you don't take it

To see what happens if you do not take your RMD you can view the IRS FAQ on this question http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions#8 [2]

The simple answer is the amount you should have taken out gets taxes at a 50% rate.   So if your RMD is $1,000 and you are in a 15% tax rate you would normally pay $150 in taxes on the distribution.  But if you do not take the RMD by the yearly deadline you will get hit with a $500 tax (50%) vs the $150 (15%.... assuming you are in the 15% tax bracket)

Calculate the amount you need to take out

There are several RMD calculators out there here are a few I found.  It’s a lot simpler to use these calculators rather than using the IRS forms to figure out what your RMD.   I found all of these calculators to be accurate.

·         http://apps.finra.org/Calcs/1/RMD

·         http://www.aarp.org/work/retirement-planning/required_minimuum_distribution_calculator/

·         https://web.fidelity.com/mrd/application/MRDCalculator

What numbers do you put in?

My father-in-law needs to get his 401k balance on 12/31/2012 to calculate what his RMD is for 2013.   Always take the account balance on 12/31 of the prior year to calculate your RMD.

Using the calculator if I put in $100,000 as his balance on 12/31/2012 (which it is not) and his age this year, 73, and click calculate I get a distribution percentage of 4.220%.  This number is based on his life expectancy.  Giving a total RMD of $4,048.58

Keep in mind the number you put in there needs to be the total of all your 401k/traditional IRA accounts.  So if you have $50,000 in a 401K and $75,000

The simple way

I find it very interesting to do calculation and understand the process, but there may be an easier way to get your RMD figured out.   I just called my father-in-laws Traditional IRA asset manager (in his case J.P. Morgan) and because it is such a simple equation they can do it right over the phone with him,  selling the shares in the mutual funds he has and sending him a check.  (which is what he did)

I am still glad for learning this.  And JP Morgan is sending him a check from his account that is the same amount the online RMD calculator.

I hope you found this article useful. J

References

[1]  Retirement Plans FAQ regaring RMD

       http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions

       Visited 12/2013

[1]  What happens  if a person does not take an RMD

       http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions#8

       Visited 12/2013