Understanding IRA Required Minimum Distributions (RMDs)

RMDs must be reported on taxes.

An IRA, or individual retirement account, helps people save money for retirement by offering tax advantages. If you have a tax-deferred IRA, such as a traditional IRA, SEP IRA or SIMPLE IRA, you must start taking required minimum distributions from the IRA in the year that you turn 70 1/2. If you fail to take a required minimum distribution from one of these IRAs, you will have to pay a penalty of 50 percent of the unwithdrawn amount. Roth IRAs are not subject to required minimum distributions.

Step 1

Look up the value of your IRA as of Dec. 31 of the previous year. You find this by checking your year-end statement or contacting your financial institution. For example, if you are calculating the amount of your RMD for 2010, the value of your IRA would be equal to its value on Dec. 31, 2009.

Step 2

Determine which IRS Distribution Period Table to use. The distribution tables are found in the appendix of IRS Publication 590. If you inherited the IRA, use Table 1. If your only beneficiary is your spouse and your spouse is at least 10 years younger than you, use Table 2. If neither of these applies to you, use Table 3.

Step 3

Use the appropriate table to find your distribution periods as determined by the IRS. These tables can be found in the appendix of IRS Publication 590. Use the age that you will turn during the year. For example, if you will turn 78 in November, use "78" even though you are 77 for most of the year. Find your age in the left hand column to find the distribution period. If you are using Table 2, your age is in the left hand column and your spouse's age is across the top. The cell where the row of your age and the column of your spouse's age meet is your distribution period. For example, if you used Table 3 and were 78 years old, the distribution period would be 20.3 years.

Step 4

Divide the value of your IRA from Step 1 by the distribution period from Step 3 to calculate your RMD. For example, if your IRA was worth $80,000 and your distribution period was 20.3 years, you would divide $80,000 by 20.3 to find that your RMD for the year would be $3,940.89.

Things You'll Need

• IRS Publication 590

• Year-end IRA statement (previous year)

• Calculator