Nothing lasts forever, and that includes the tax-sheltered growth of individual retirement accounts. Though you can avoid paying taxes on the money for decades, eventually, Uncle Sam will want his cut. Starting in the year you turn 70 1/2 years old for traditional IRAs or the year after the original owner of a Roth IRA dies, the Internal Revenue Service forces you to start taking money out of the IRA in the form of required minimum distributions, or RMDs.
When Distributions Are Required
For traditional IRAs, RMDs begin in the year you turn 70 1/2 years old. The first year that you're required to take a distribution, you have until April 1 of the following year to withdraw the money. But your RMD for future years must be completed by the end of the calendar year. For example, say you turn 70 1/2 in November 2015. You have until April 1, 2016, to withdraw the money. But you must also take out your 2016 RMD by Dec. 31, 2016.
Roth IRAs are different: You're never required to take distributions as long as you are the original owner of the Roth IRA. But if you inherit a Roth IRA, the rules are the same as they are for inherited traditional IRAs when the owner died before April 1 of the year after turning 70 1/2, also known as the required beginning date.
Calculating IRA RMDs
The RMD for an IRA equals the value of your IRA divided by your life expectancy. The IRA value is determined as of the first day of the calendar year. For example, your 2015 RMD is calculated based on the value of your IRA as of Jan. 1, 2015. Your life expectancy is determined based on the life expectancy tables in IRS Publication 590. If the IRA is yours, use the Uniform Lifetime Table unless the sole beneficiary of your IRA is your spouse and your spouse is at least 10 years younger than you; if that's the case, use the Joint Life and Last Survivor Table. If you're a beneficiary of the IRA, you use the Single Life Expectancy Table. For example, if your life expectancy is 10 years and your IRA is worth $120,000, your RMD is $12,000.
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Penalties for not Taking RMDs
If you fail to take your RMD in time, the IRS assesses a penalty equal to 50 percent of the amount you should have withdrawn. For example, if you should have withdrawn $12,000 but missed the deadline, you owe a $6,000 tax penalty. If you believe you made a reasonable error and have taken steps to make up for the shortfall in required distributions, you may request a waiver of the penalty using Form 5329 when you file your income taxes. For example, the IRS might waive the penalty if your bank mistakenly processed your request to withdraw the full $12,000 but only distributed $1,200; you should be able to prove you immediately contacted the bank to withdraw the rest but the bank wasn't able to complete the withdrawal before the due date for your RMD.
The IRS does not have a form that you're required to fill out when you take a required distribution. Even though RMDs are required, they still count as taxable income that you must include when you file your income taxes. Your financial institution will send you a Form 1099-R documenting your withdrawal for tax purposes. However, your financial institution may have a form for you to complete if you want the RMDs taken out automatically. For example, if you provide your birthday, your bank might be willing to calculate your RMD for you and automatically make distributions to you over the course of the year.