As you approach retirement, it’s important to understand how to calculate your required minimum distribution (RMD). This is the minimum amount you must withdraw from your retirement accounts each year, beginning at the age specified by the Internal Revenue Service (IRS). By figuring out your RMD, you can avoid unnecessary taxes and penalties while helping to ensure that your retirement savings last as long as possible. In this article, we’ll walk you through the steps required to determine your RMD accurately and efficiently.

Step 1: Determine Your Applicable Age and RMD Start Date

The first step in calculating your RMD is determining when you are required to begin taking these distributions. According to IRS rules, you must start withdrawing RMDs by April 1st of the year following the year you turn 72. Prior to 2020, this age was set at 70½; however, recent legislation pushed back the starting age for RMDs.

Step 2: Identify Your Account Balances

Next, identify which of your retirement accounts are subject to RMDs. The most common types of accounts include traditional IRAs, SEP IRAs, SIMPLE IRAs, and employer-sponsored plans such as 401(k)s,403(b)s, and profit-sharing plans. For each account subject to RMDs, make note of the account balance as of December 31st of the previous year.

Step 3: Obtain Uniform Lifetime Table Factors

To determine RMD amounts for each account, you’ll need to refer to the IRS’s Uniform Lifetime Table. This table provides life expectancy factors based on your age at the end of the year for which you are calculating your RMD.

You can find the Uniform Lifetime Table in IRS Publication 590-B or on the IRS website directly. Locate your age within the table and note down the corresponding “distribution period” or life expectancy factor.

Step 4: Calculate RMD Amounts

To calculate the RMD for each account, take the account balance as of December 31st of the previous year and divide it by the life expectancy factor (distribution period) from the Uniform Lifetime Table.

For example, if you’re 72 years old and had an IRA balance of $100,000 at the end of last year, your life expectancy factor from the table would be 25.6 years. Your RMD calculation would then be:

$100,000 ÷ 25.6 = $3,906.25

Thus, your RMD for that account would be $3,906.25 for the current year.

Step 5: Aggregate and Withdraw RMD Amounts

Once you’ve calculated RMDs for each account subject to these rules, you can decide how to withdraw the funds. For IRAs (including SEP and SIMPLE IRAs), you can aggregate or combine your RMD amounts across all accounts and withdraw from one or more as long as you satisfy the total required distribution. For employer-sponsored plans such as 401(k)s or 403(b)s, you must take individual RMDs separately from each account.

Conclusion

Understanding how to calculate required minimum distributions is essential to managing your retirement savings and tax liabilities effectively. Keep track of your qualifying accounts’ balances, refer to the IRS’s Uniform Lifetime Table for life expectancy factors, and calculate each RMD based on these criteria to stay compliant with IRS guidelines and make the most of your hard-earned retirement funds.