When the time comes, you must start withdrawing the money you’ve accumulated.
During your working life you may have participated in several employer plans and opened a number of IRAs. Knowing where those accounts are and what they’re worth takes on even greater urgency as you turn 70½ and must begin required minimum distributions (RMDs) from tax-deferred accounts. (Distribution is the official term for what are more commonly known as withdrawals that you take from these plans.)
Consolidating your IRA accounts with a single custodian may be a smart move. It may save you money if you’re paying annual account maintenance fees to different custodians. More important, it means that all the information you need on your account values and the way those accounts are invested is contained in one consolidated statement.
What consolidation doesn’t mean is that all the IRAs are collapsed into a single account. In fact, you can’t combine a tax-free Roth IRA and a tax-deferred IRA into a single account unless you convert everything to Roth status. Rollover IRAs are generally held separately from IRAs to which you’ve made annual contributions. And, if you’ve made both deductible and nondeductible IRA contributions, you’ll want to be sure to keep records of the amounts in each category since you’ll need them to figure the income tax you owe.
Following the rules
In many ways, taking money out of several IRAs is easier than taking money out of several 401(k)s, 403(b)s, or similar accounts. That’s because, with IRAs, you can calculate the total you must withdraw for the year, based on the combined value of all of the IRAs, and take it from a single account if you wish. With multiple 401(k)s, you must take the correct amount from each account.
However, if you have made both deductible and nondeductible contributions over your career, you must treat withdrawals as if they came from all your IRAs proportionally even if you have always kept the accounts separate.
Add up your IRAs
Required withdrawals at 70½ are based on the total value of all your accounts.
Setting the amount
Between ages 59½ and 70½, you may take as much or as little as you wish from your IRAs each year without a 10% tax penalty. After you reach 70½, you must take at least the required minimum each year from tax-deferred IRAs. You find that amount by dividing your account value by a distribution period based on your life expectancy.
You can take the entire withdrawal from just one IRA at a time, even if you have several. One advantage is that you can postpone withdrawing from accounts that may be growing at a faster rate.
Figure your withdrawal amount
You don’t want your account to provide too little money or run out too quickly.
Getting the right numbers
If you have $250,000 in your IRA, and you have a distribution period of 20.3 years, you need to withdraw $12,315.27. You can use the formula below to figure out the size of the withdrawal you have to make:
Account balance / Distribution period distribution = Required minimum
$250,000 / 20.3 = $12,315.27
Avoid tax penalties
You’ll owe extra tax for withdrawing too little.
Getting the numbers wrong.
If you miscalculate the amount you must withdraw and take too little, you’ll get socked with a 50% tax penalty on the additional amount you should have taken and didn’t. That’s true even if it was an honest mistake — unless you can prove to the IRS that it was a reasonable error.
If you take large withdrawals, of course, you pay more tax than you might have otherwise, and you’ll deplete your account faster. But there aren’t tax penalties for that.
Decide on a source
You have to decide which investments to sell or withdraw from.
Finding the cash
Figuring out how much you must withdraw each year is only part of your task. You also have to decide how to get at it. You might want to include a money market account or fund in your IRA into which dividends, interest, mutual fund distributions, and the proceeds of any investments you sell are paid. Those amounts should cover some and may cover all of your annual RMD. You can think of it as the equivalent of an emergency fund. Planning ahead in this way should prevent having to sell stock or bonds when the market price is down or take money out of a CD before the term has expired.
Those amounts should cover some and may cover all of your annual RMD. You can think of it as the equivalent of an emergency fund.
Planning ahead in this way should prevent having to sell stock or bonds when the market price is down or take money out of a CD before the term has expired.
Required minimum distribution formula
The IRS provides a uniform lifetime table to help you determine your required minimum distribution (RMD), or the annual amount you must withdraw each year after you turn 70½. This method makes figuring the amount you must take relatively simple. If your spouse is your beneficiary and more than ten years younger than you, you use a different table and take smaller RMDs.
Calculating your RMD is easy. You simply divide the value of your IRA at the end of the year prior to the year for which you are taking the RMD by the distribution period, which is determined by your age.
There’s no penalty for withdrawing at a faster rate than is required. But the more you take out, the more tax you’ll owe. The other consequence could be reducing the principal on which future earnings may accumulate especially if you withdraw at a higher rate than the return you realize on the account.
Required minimum distribution for a $100,000 IRA
Age Distribution period
$100,000 / 27.4 = $3,650 RMD
Age Distribution period
$100,000 / 22.9 = $4,367 RMD
Required Minimum Distributions – How Much Can You Withdraw From Retirement? by Inna Rosputnia
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