What Percentage of Your IRA Must You Withdraw After 70?

Congress created the Individual Retirement Arrangement, or IRA, in 1974, with the passage of the Employee Retirement Income Security Act of 1974. Congress wanted to provide a way for workers not covered by a workplace pension to save for their retirements. Congress intended the IRA to be part of a "three-legged stool" of retirement income: In addition to individual savings, the other two legs were to be traditional pensions and Social Security benefits.

Tax Treatment of IRAs

Contributions to traditional IRAs are tax deductible, up to a maximum of $5,000 per year for most workers. Congress allows workers over age 50 to make additional contributions of $1,000 per year in "catch-up" contributions. Assets in IRAs accumulate tax-deferred. That is, no income tax is payable on dividends, and no capital gains tax is due when you sell IRA assets at a profit. Assets withdrawn after age 59 1/2 are taxed as income, and a 10 percent early withdrawal penalty may apply to withdrawals made before age 59 1/2.

Required Minimum Distributions

The IRA was never meant to be a free ride from taxation. The IRS will not allow you to defer taxes on an IRA forever: Instead, the law requires you to begin making withdrawals - and incurring taxation - starting April first of the year following the year in which you turn age 70 1/2.

Figuring the RMD Percentage

You can estimate your own required minimum distribution (RMD) by looking up your life expectancy and dividing your year-end IRA balance by the number of years of life expectancy, either for yourself, or the joint life expectancy for you and a spouse. Use the tables given in Appendix C of IRS Publication 590, Individual Retirement Arrangements (See Resources).

Restrictions

You cannot roll over into a Roth IRA or other retirement plan that portion of IRA assets you are required to distribute, or withdraw, during the current tax year. Special rules apply for distributing from retirement annuities within IRAs. Also, if your spouse is 10 years or more younger than you are, you must use table II from Appendix C, the Joint and Last Survivor actuarial table, to compute your required minimum.

Considerations

If you fail to take an RMD, the IRS will charge a penalty of 50 percent of the RMD you were supposed to take. You may wish to spend down your traditional IRA and 401k assets first, then spend down nontaxable sources of income, such as Roth IRAs and life insurance cash values.

You may also wish to divide income between taxable and nontaxable sources, so that your taxable income does not push you into a higher tax bracket -- a planning technique called "tax diversification."

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