Current tax law specifies that once you reach age 70 1/2 you must begin making taxable withdrawals from your Traditional IRAs and many other retirement plans. These minimum distributions are calculated annually based on your age, account balance at the end of the previous year, marital status and spouse’s age. If you do not meet the annual minimum distribution, you may be subject to a 50% penalty on your underpayment, plus ordinary income tax as the funds are withdrawn.
Calculate the Projected Minimum Distributions I Am Required to Pay
If you are saving for retirement, you may want to keep your investments in their accounts as long as possible to allow them to grow, but you must consider required minimum distributions (RMDs) to appreciate how they may affect your tax burden after retirement and the growth of your investments.
Required minimum distributions are the minimum amount you must withdraw from most retirement accounts (including IRAs, profit-sharing plans and other accounts), starting at a specific age. Only Roth IRAs are excepted. For most accounts, that age is 70.5, although, for some accounts, you can wait until the year you are retired.
Why Estimate Your RMDs?
It is crucial to estimate the required minimum distributions in retirement because the penalties for not taking out RMDs are high. If you take out less than the minimum or fail to make withdrawals at all, you will need to pay a 50% federal penalty tax. This rate applies to the difference between what you should have withdrawn and what you did withdraw.
In addition to this penalty, you will need to withdraw the correct amount and pay any additional tax owed on that amount. Of course, you are free to withdraw more than the minimum.
Knowing how much you will need to withdraw and when is crucial for helping you determine how to plan for retirement. It means you will not be able to grow your money past 70.5 without losing some of that money through withdrawals. This may mean you need to set aside more money now to account for RMDs.
If you are planning on having a lower tax burden in your 70s and are making choices about tax-deferred accounts now, keep in mind required minimum distributions can add to your income as well as your tax burden in your retirement age. Calculating your RMDs now lets you avoid surprises later.
How Do I Figure out My Required Minimum Distributions?
You can get a rough estimate of your required minimum distributions by looking at the IRS charts for life expectancy factors and dividing the balance of your retirement account by the factor related to your age. You can also get a more detailed estimate of your RMDs without looking for IRS charts by using the Money Help Center RMD calculator.
This calculator lets you examine your required minimum distributions with a consideration of your marital status, beneficiary and the expected interest rate on your account, for more complete results. The calculator is also simple to use so that you can compare different scenarios. Be sure to check out all Money Help Center calculators. These free and unbiased resources can help you understand your finances, so you can create financial plans from a knowledgeable position.