Do you have an IRA (Individual Retirement Accounts) in the United States? If you do and you are approaching age 70, you are on the threshold of commencing required minimum distributions or you will face substantial penalties. The following article explains these rules.

Traditional IRAs (Individual Retirement Accounts)

If you own a Traditional IRA you may take a distribution from the IRA at any time.  However, if you take the distribution before you reach age 59½ you must pay not only the normal income tax on the distribution but you are also subject to a 10% penalty tax (with certain exceptions).  Once you reach age 70½ you must generally start receiving distributions from your IRA by April 1st of the following the year.  This date is referred to as the Required Beginning Date (RMD).

If you do not take the RMD, or if the distribution is not large enough, you will be subject to a 50% excise tax on the amount of the RMD not distributed.

Even if you begin receiving distributions before you reach age 70½, you must calculate and receive the RMD once you have reached the age of 70½.

The post-70½ age IRA distributions may exceed the RMD in any given year. However, you cannot treat the excess (the amount that is more than the RMD) as part of your RMD for any later year and claim a credit for it in later years. For example – the RMD in 2016 is $1,000 and you withdraw $1,500. For 2017, the RMD remains at $1,000, in which case, you cannot reduce the RMD by the additional $500 you withdrew in 2016. The RMD for both 2016 and 2017 is $1,000.

Figuring the Required Minimum Distributions

The RMD needs to be calculated for each year by dividing the IRA account balance as on December 31^st of the preceding year by the applicable distribution period or life expectancy.

The IRA account balance is the amount in the IRA at the end of the preceding year for which the RMD is being figured and comprises of:

1.      Contributions – Contributions increase the account balance in the year they are made.
2.      Outstanding rollovers and re-characterizations – The IRA account balance is adjusted by outstanding rollovers and re-characterizations of Roth IRA conversions that are not in any account at the end of the preceding year.
3.      Distributions – Distributions reduce the account balance in the year they are made.

Distribution Period: This is the maximum number of years over which you are allowed to take distributions from the IRA.  For example, if you are age is 71 at the end of the preceding year, the distribution period is 26.5 years. This can be found in Table III in Appendix B of IRS Publication 590-B.

Life Expectancy: Your life expectancy for 2017 is listed in Table I in Appendix B of Publication 590-B.

Table II is used by IRA owners who have joint life expectancy and used by owners whose spouses are more than 10 years younger and are the sole beneficiary of their IRAs.

Roth IRAs

If you are a Roth IRA owner, you do not have to take distributions regardless of your age. Hence, Required Minimum Distributions rules do not apply and you can start withdrawing at any age you prefer. Be careful, withdrawing before the age of 59½ may result in the additional 10% tax on such early distributions.

Source:
IRS Publication 590-B:
https://www.irs.gov/pub/irs-pdf/p590b.pdf
https://www.irs.gov/publications/p590b/ch01.html#en_US_2016_publink1000230736