Figuring out your minimum individual retirement account (IRA) distribution or required minimum distribution (RMD) is critical to avoid tax penalties when the time comes to make such withdrawals. Generally, with a traditional IRA, this trigger occurs at age 70 1/2. For a Roth IRA there is no RMD. The RMD amount is specified in the Internal Revenue Service (IRS) rules and is fairly easy to follow.

Determine Your Balance

The amount of your RMD is going to depend on what you have in your IRA. Keep in mind that the IRS tends to treat your various pretax IRA accounts as one pretax IRA, so you don't get to avoid an RMD on other accounts just because you took a withdrawal from one account. You need to determine your total balance from all your accounts via your most up-to-date account statements when you hit 70 1/2 years of age. To be safe, you could do so at age 70 exactly per IRS instructions, but you will be off slightly depending on how much six months of interest and profits occur in the meantime.

Fair Market Value

The account value to be used is the fair market value. You are not allowed to use net deposit worth or anticipated investment value or any other project calculation for a minimum (keep in mind you can always withdraw more than the required RMD). The base account total has to be what the fair market value is as of December 31 of the year you are age 69, at a minimum.

Find the Rate of Return

Determine what your rate of return will be on your IRA. Most people at this point will be using safe deposits such as savings accounts, CDs, and bonds. All of these have fixed interest rates for the most part, so the calculation is just a matter of figuring out the basic math. However, if you have IRAs in the stock market, you will have to make a best guess on your rate. You should guess conservatively with the perspective of making sure you take out enough in your RMD in such cases (for example, if you think the stock market will return 5 percent, then calculate 7 percent so your RMD is not too little based on the math).

Count On Your Birthday

If your birthday is before June 30 in the year, then your first RMD is at age 70. If, however, your birthday is between July 1 and December 31, then your first RMD is at age 71. This reduces your total number of years and your RMD. So if you originally had 26 years of estimated life, you would instead have 25.

Final Calculation

Using your total IRA account balance, divide it by the correct distribution period for you per the IRS (see IRS Publication 590). Then take the result and use that that for RMD. For example, an account worth $100,000 with 25.6 years would require an RMD of $3,097 (rounded to dollar). You will need to adjust this every year after your first RMD due to your rate of return and any other account profits. While you can use the straight math as suggested, you can also project what your balances will be over your lifetime with your estimated rate of return, and then determine what you will have left as you move along your life cycle. This again will modify your RMD. But keep in mind, the straight math on the existing balance is the least amount you must withdraw each year.

Source:

How to Determine Your RMD

Know Your Required Minimum Distribution

Internal Revenue Service: Publication 590

More Information:

AARP RMD Calculator

Strategic Ways to Distribute Your Retirement