How to Calculate Your Required Minimum Distribution

You must take a required minimum distribution (RMD) from your retirement account in the year you turn 70-1/2. This policy is in place to prevent excess accumulation in the accounts of wealthy tax payers who would like to keep the funds in a retirement account where they can grow tax free. The IRS mandates all taxpayers begin withdrawing funds, even if they do not need to do so, to assure all taxpayers do release funds from retirement accounts prior to death. To determine your RMD, follow two simple steps.

Step 1: Calculate Account Balance

You will need to determine your account balance at the end of the prior tax year. To do this, you can contact your plan provider. Determine your account balance in every retirement account you hold. It is important to remember to include any funds that were in transit at the time even if they were not fully-vested in the account. The IRS will consider these deposits when it holds you accountable to your RMD. 

Step 2: Divide by Age Based Factor

The second step is to divide your account balance by what the IRS calls your "age-based factor." This is a simple number you can find for yourself on the IRS's Uniform Lifetime Table. The table considers your age, your sex and whether you are single, married, widowed and other factors to estimate your life expectancy. The table then outputs a figure to attempt to assure you have $0 left in your account on the day you pass away. Of course, this rarely ever actually occurs because different factors affect your account balance and age-based factor each year. On the whole, though, the schedule is designed to assure you have enough money to live out your retirement but leave no funds in the account unnecessarily. 

Make a Single Account RMD

If you have only one retirement account, the process is very straightforward. You must simply deduct the amount you calculated in steps 1 and 2. You will pay taxes, if they are owed, on the funds at the time you withdraw them. You can then reinvest them in other taxable accounts or spend the funds as you wish. If you fail to take your RMD, an excess accumulation penalty of 50 percent of the amount you failed to distribute will be assessed from your account.

Make a Multiple Account RMD

When you have more than one retirement account, you can group accounts of like-kind together. For example, Roth IRAs can be lumped with other Roth IRAs, and your 401ks from two different companies can also be lumped together. You then calculate an RMD from each grouping. As long as the accounts are in your name and are of like kind, you can withdraw your entire RMD from one of the accounts instead of withdrawing proportionally from each. You cannot do this with two separate kinds of retirement accounts, however. If you do so, you will be charged excess accumulation penalties on the accounts you did not withdraw from properly.