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Avoid Costly Mistakes When Calculating Required Minimum Distributions From IRAs

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The deadline for meeting IRA Required Minimum Distributions (RMDs) is right around the corner.  Calculating the amount that needs to be distributed can be complicated.  In addition, the penalty for not meeting the RMD is steep, at 50% of the amount not withdrawn.

At age 70 ½, account owners must begin withdrawing RMDs from IRA accounts on an annual basis.  The calculation of the require distribution amount is made by dividing the prior year-end balance of the IRA by the number from Table III of IRS Publication 590 that corresponds to the highest age one has attained for the year.  Here’s an example:

Susan turns 70½ on February 1st of 2013.  The year-end balance of her IRA in 2012 was $100,000.  She should use 26.5 as her divisor, since she will turn 71 within the year.  By dividing 26.5 by the 100,000 year-end account balance, she calculates her distribution to be $3,773.58. From then on, Susan will continue to reference the IRS chart every year for her new divisor using her highest age for the year.

In general, RMDs must be taken by December 31 every year.  There is an exception.  First year distributions can be delayed until April 1st of the following year.  However, if electing this option, it’s important to understand that the delay results in two RMDs taken in the same year, which may result in higher taxes being paid. Also note that for IRA accounts for which the sole-beneficiary is more than 10 years younger than the account owner, Table II should be referenced, not Table III.

RMDs from inherited, or beneficiary, IRAs are commonly miscalculated.  Rather than using the IRS table every year to determine the applicable RMD, owners of inherited IRAs should use the “minus one” method.  Let’s look at another example:

Jane’s birthday is 6/1/1983.  She must take an RMD from the IRA she inherited from her mother.  Jane’s highest attained age in 2013 is 30.  Jane uses Table I from the IRS publication to get her divisor of 53.3.  The account balance at the end of 2012 was $100,000.  She divides $100,000 by her divisor of 53.3 to calculate her first year RMD of $18,76.17.  Next year, she should not reference Table I, but instead subtract 1 from her previous divisor.  Therefore, in 2014, she would divide by 52.3.  Every subsequent year, Jane will continue to subtract one from the divisor to arrive at the correct calculation. 

Remember that although the IRA custodian or retirement plan administrator may calculate the amount to be withdrawn, it is ultimately the account holder who is responsible for calculating and making the timely withdrawal.  Therefore, we recommend consulting with a tax advisor or Certified Financial Planner™ practitioner to assist with the calculation.

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