Business

How Do I Calculate My RMD?

Are you someone who is wondering what an RMD is? Do you wish to know how you could easily calculate RMD without any hassle? If that is the case, then you have come to the right article.

In this article, we will be helping you by giving you the proper knowledge and information regarding RMD, also known as Required Minimum Distribution. So if that is the case, then continue reading to find out all there is to know.

Understanding the required minimum distribution

If you are among many individuals out there who do not know what a required minimum distribution is, then you have absolutely nothing to worry about. In simple words, RMD is the total sum of money that is supposed to be withdrawn by an employee as per their retirement plan.

The laws for withdrawing the amount have been changed, but the latest update, which was back in 2020, stated that a person could withdraw this amount at the age of 72, not 70.5 years old. It must be mentioned that if you are someone who has more than multiple accounts, then you would need to calculate an RMD value for every account.

Now the reason why many people find RMD beneficial is because it protects people from paying taxes. The majority of individuals out there hire an administrator who will calculate such amounts of RMD for them, but if you are someone who does not want to hire, then finding out how you could calculate by yourself is a great idea.

Calculating RMD

Now it must be mentioned that before you begin the process of calculating your RMD, you should check and confirm on the IRS website. Now it is completely normal to have different situations which require a different set of calculations.

All of these depend directly on your account type, its age, and the type of program you are a member of. For instance, for understanding, let’s assume that you have an account that carries a beneficiary from your spouse.

In this case, you would have a different table of accounts than other individuals of a similar account holder. Knowing what type of account you have, your beneficiary details, and the advantages your account provides could help you a lot, especially when calculating the correct value of the required minimum distribution (RMD).

Steps involving the calculation of the required minimum distribution (RMD)

If this is your first time calculating a required minimum distribution, you should keep in mind that there are essentially only three steps. In summary, the first step usually involves writing down the total account balance as of December 31st of the previous year. You should always remember to include any transfers and plans that you are associated with, such as insurance, life support plans, etc.

After this is done, the second step would be to safely find the distribution factor that is located on the table. This table is specific to every account holder.

For the majority of individuals out there, the distribution factor number ranges between 27.4 and 1.9. Any number above or below the range indicates an extreme distribution factor.

It is worth mentioning that as a person gets older, the factor number goes down, meaning the number moves toward the zero end of the line. Last but not least, you divide the account balance by the factor number which you have just found in the previous step two.

RMD distribution taxed

Perhaps one of the most common questions that account holders have before calculating their required minimum distribution (RMD) is whether or not it is taxed. Well, simply put, the answer to that question is yes, they are taxed.

The reason behind this is that RMDs are typically withdrawn from retirement accounts that had previously made small or large contributions to pre-tax dollars.

Now knowing this, many people may choose not to take RMD out at all. This poses a problem in the future. If you are someone who is over the age of 72 and decides not to take your acquired sum of RMD, you would be penalized and would have to pay a 50% tax.

With that being said, it is always a wise option to have your RMD value withdrawn so that you do not have to undergo severe penalties. Let’s now take a look at several tools that may prove useful when deciding to calculate the required minimum distribution (RMD) by yourself.

Uniform lifetime table

You may remember earlier in the article; we talked about how the second step in calculating an RMD value involves the use of a lifetime table, also known as an RMD calculator.

If it is your first time calculating the required minimum distribution value, you may find it confusing and difficult to understand and interpret the value. The first thing that you have to know is the formula which is a universal formula. The formula used to calculate the RMD value is following:

Account balance (as of December 31st) divided by life expectancy factor (use of table which corresponds to your age) = your RMD value

It must be mentioned that if you are someone who uses IRS joint life expectancy, then you would have to use a different uniform lifetime table. This is a mistake that many individuals out there make, and this results in the wrong required minimum distribution (RMD) value.

If you feel like you do not know where to find the right table that corresponds to your specific situation, then it is wise to seek the help of a professional who has gone through the process of calculating the RMS value.

RMD value per year

Now that you know how to calculate the required minimum distribution value let’s take a look at how much you need to take out every year. It must be kept in mind that as long as you withdraw the minimum needed amount, you can take your RMD from one account in full or in installments from each.

This is particularly helpful if you are someone who is a holder of more than one account with different plans. The reason why this is beneficial is that it allows you to take out a specific sum of RMD every year for each bank account you own, whether it be a shared account or a single one.