If you own a retirement account or an inherited IRA, at some point you’re going to have to understand how to use RMD tables. I wish you could just rely on your IRA custodian. Sadly, I’m afraid you can’t. You see I discovered several years ago that most IRA custodians (and many CPAs) don’t really know how to calculate RMDs. As a result, I double check every required minimum distribution and so should you.
The first step is to understand what an RMD is. The term “RMD” stands for Required Minimum Distribution. This is the amount you must withdraw from your retirement account. The amount depends on your age and the kind of retirement account we’re talking about. Using this information you can look up your factor from IRS Publication 59 using the RMD tables.
For purposes of this post, I’m going to look at a regular IRA and a Beneficiary IRA account to demonstrate how to use those tables.
Here’s the table you would use for any IRA account other than a beneficiary IRA:
You can see that if you are 70, your factor is 27.4 and if you are 80 your factor is 18.7. To illustrate the importance of this factor, let’s assume you have an IRA with a balance of $100,000 as of 12/31 last year. (Your RMD is calculated based on the value as of 12/31 on the prior year.)
So if you are 70, you take your $100,000 and divide it by your factor of 27.4 to arrive at $3649. This is your RMD for the current year.
If you are 80 and have a $100,000 use the factor of 18.7. In that case, you’ll get an RMD of $5347 if you divide your balance of $100,000 by the factor of 18.7.
You can see that as you age the required minimum distribution rises. That’s because the government wants you to take all the amount of your IRA before you pass away so they can tax you on it. Greedy.
How the IRS Calculates Your Age and Why It Matters
Let’s say you turn 70 ½ in January this year. That means you are going to turn 71 by July. So when you calculate the RMD, which age do you use? 70 or 71? The answer is that the IRS wants you to use the RMD tables based on your age at the end of the year. So in this case, you’d use 71 to look up your factor on the RMD tables. It’s pretty straight forward – if you know what the IRS is looking for.
How to use the RMD Tables for Beneficiary (Inherited IRA) Accounts
Here’s the table the IRS provides:
You are required to start taking RMD’s in the year following the death of the owner of the account. So to calculate your RMD here’s the best way to run the calculation.
- Take the year the owner died
- Add one
- Subtract the year you were born. That is how old you were when you were required to start taking your Inherited IRA RMD.
- Look up your factor.
So if you were born in 1970 and you inherited an IRA in 2011 here’s what it looks like.
2011 + 1 – 1970 = 42.
So you turned 42 in 2012. Using the table above, your factor is 41.7. If the value of the account was $100,000 on 12-31-11, your RMD is $100,000/41.7 or $2398.
In the following years, you simple subtract 1 from the original factor to determine your divisor. So by 2022 your factor will be 31.7. Make sense?
This is different from the calculation for “normal” RMD’s. For those, you have to consult the table every year. For Inherited IRAs, you don’t have to consult the table after you calculate what your first factor was.
Using the RMD tables is pretty easy if you simply understand how the IRS views your age. You’d think that your IRA custodians would be able to do this calculation but trust me, they can’t. Fortunately for you, it’s easy to do this yourself and confirm that the RMD your custodian tells you to withdraw is the correct amount.
Do you confirm the RMD your custodian and/or CPA calculates for you? What have you found?