I must start receiving distributions from my IRA & 401(k) accounts. How do I determine the amount I must withdraw each year to avoid a penalty?

To determine the amount you must withdraw each year from your IRA and 401(k) accounts to avoid a penalty, you need to calculate the Required Minimum Distribution (RMD) for each account. The RMD is the minimum amount you must withdraw annually starting at a certain age to avoid a 50% excise tax on the amount not distributed as required.

Required Beginning Date

For both IRAs and 401(k) accounts, the required beginning date is April 1 of the year following the year you reach age 72 (or age 73, depending on when you reach age 72). This is in accordance with the SECURE Act, which extended the age from 70½ to 72.

Calculation of RMD

The RMD is calculated by dividing the account balance as of December 31 of the previous year by a life expectancy factor that the IRS publishes in tables. The specific table you use depends on your circumstances:

1. Uniform Lifetime Table: Used if you are an unmarried owner, an owner whose spouse is not the sole beneficiary, or an owner whose spouse is not more than 10 years younger.
2. Joint and Last Survivor Table: Used if your spouse is the sole beneficiary and is more than 10 years younger than you.
3. Single Life Expectancy Table: Used if you are a beneficiary of the account.

Steps to Calculate RMD

1. Determine the Account Balance: Find the balance of your IRA or 401(k) account as of December 31 of the previous year.
2. Select the Appropriate Life Expectancy Table: Based on your situation, choose the correct table (Uniform Lifetime Table, Joint and Last Survivor Table, or Single Life Expectancy Table).
3. Find the Life Expectancy Factor: Locate your age (or the age of the oldest beneficiary, if applicable) in the chosen table to find the corresponding life expectancy factor.
4. Calculate the RMD: Divide the account balance by the life expectancy factor.

Example Calculation

Assume you are 72 years old in 2024 and have a 401(k) account with a balance of $986,400 as of December 31, 2023. Using the Uniform Lifetime Table, the life expectancy factor for age 72 is 27.4.

[ \text{RMD} = \frac{$986,400}{27.4} = $36,000 ]

You must withdraw at least $36,000 from your 401(k) account in 2024 to avoid the penalty.

Special Rules for Multiple Accounts

• IRAs: If you have more than one IRA, you must calculate the RMD for each IRA separately. However, you can total the RMDs and take the total amount from any one or more of the IRAs.
• 401(k) Accounts: You must calculate and withdraw the RMD separately for each 401(k) account.

Penalty for Insufficient Distributions

If you fail to withdraw the RMD, you may be subject to a 50% excise tax on the amount not distributed as required. This penalty is significant, so it is crucial to ensure you meet the RMD requirements each year.

By following these steps and using the appropriate tables, you can determine the amount you must withdraw each year from your IRA and 401(k) accounts to avoid penalties.

Sources:
Publication 590-B (2023)
Publication 590
Publication 1380
Required Minimum Distributions, Social Security, and Tax Strategies
§ 1.401(a)(9)-9. Life expectancy and distribution period tables.
§ 401. Qualified pension, profit-sharing, and stock bonus plans