Approaching 70? Watch IRA Rules

Approaching 70? Watch IRA Rules Turning 70 soon? Happy Birthday! If you own an IRA, your 70th birthday is significant too. During the year you turn seventy years and six months of age, you must begin to make taxable withdrawals from your Individual Retirement Account. You are responsible for knowing when to begin these withdrawals, and for withdrawing at least the required amount. If you neglect to start the withdrawals on time, or miscalculate how much you need to take, the penalty is 50% of the amount you were supposed to withdraw.

Many retirees get tripped up by these "RMD" rules, which stands for Required Minimum Distributions. Promulgated by the Internal Revenue Service, the rules are explained clearly in IRS Publication 590. You can obtain a copy on the IRS web site,, or call the IRS at 1-800-829-3676 and they will mail you a copy.

Most investment companies send letters to their IRA owners to remind them of this event. They will also calculate the minimum distribution for you. But it is ultimately your responsibility to get it right, so let's go over the rules.

When It Begins

For your first withdrawal only, the IRS gives you until April 1st of the year following the year in which you turn 701/2. If you wait until April 1st to take this first withdrawal, you will pay income tax on two annual withdrawals in the same year, since your second annual withdrawal must also take place before the year ends. For tax reasons, it is usually better to withdraw the first RMD in the calendar year in which you turn 701/2.

How to Determine the Amount
How do you figure out the RMD? My vote is to call your investment company or financial advisor and ask them to calculate for you. If you have more than one IRA, you must figure the RMD separately for each one.

If you wish to calculate it for yourself, you need to consult a chart from IRS Publication 590. The chart is called the Uniform Lifetime Table, which applies in most, but not all, cases.

Using this table, a 70-year old IRA holder with a closing prior year account balance of $50,000 is assigned a life expectancy of 27.4 years by the IRS. Divide the $50,000 figure by 27.4 and you have your Required Minimum Distribution for the year: $1824.82.

If your IRA continues to grow after age 701/2, you'll find that your RMD will go up. For example, say the balance is still $50,000 after 5 years of withdrawals because of investment appreciation. At age 75, your life expectancy has been whittled down to 22.9 years. Your RMD for the year? $2,183.41.

If you forget to make your annual withdrawal, the penalty is 50% of the amount you were supposed to take out: for our 70-year old, that's $912.41 ($1824.82 times 50%).

That's a hard hit for someone living on a fixed income.

Advisor is a Certified Financial PlannerTM practitioner and is a registered representative with and offers securities through Linsco/Private Ledger (LPL), Member NASD/SIPC.

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