When you own a traditional IRA you benefit from a number of tax advantages. Your contributions may qualify for a tax deduction (provided that you meet certain income limits), and investment earnings in the plan accumulate tax free. You only pay tax when you begin taking withdrawals.
One major restriction is that you are forced to take distributions once you reach age 70.5. Failure to do so can result in a hefty 50 percent penalty from the IRS.
Minimum Required Distribution Rule
The IRS stipulates that you must begin receiving at least a minimum distribution from your traditional IRA every year, starting with the year in which you turn age 70 1/2. If you do not receive the minimum distribution amount in that year, you must receive it no later than Apr. 1 of the following year. In each following year, you must receive the minimum distribution amount for that year no later than Dec. 31 of that year.
For example, if you were born on May 15, 1948, you will reach age 70 1/2 on Nov. 15, 2018 and, therefore, must receive your first minimum distribution for the year 2018 no later than Apr. 1, 2019. Your minimum distributions for 2019 must be received no later than Dec. 31, 2019, and so on, for each following year.
Calculation of Minimum Distribution
The minimum distribution amount for each year is calculated by dividing the IRA account balance on Dec. 31 of the previous year by the applicable life expectancy provided by the IRS in Table C of Publication 590 based on your age and the age of your spouse, if applicable, on Dec. 31 of the previous year. A special table exists if you are married and if your spouse is more than 10 years younger than you and is the sole beneficiary of your plan. Otherwise, use the Uniform Lifetime table.
For example, if you are 75 years old on Dec. 31 and your spouse is 55, your joint life expectancy according to the table is 30.4. If your IRA balance is $100,000, your required minimum distribution is $100,000/30.4, or $3,289.47.
More Than the Minimum Received
You may elect to take any amount of distribution you wish, although you're not required to take a distribution until over age 70 1/2. The minimum distribution rules are not affected by the amount of distribution you receive each year. Excess distributions over the minimum do not reduce your minimum for next year, except for the fact that your IRA account balance on Dec. 31 may be lower due to the higher withdrawal.
Penalty for Not Enough Distributed
If you fail to receive the required minimum distribution in a given year, you may be subject to a penalty tax of 50 percent of the any required minimum amount left undistributed. Some exceptions may apply, such as an error that you are in the process of rectifying or in the unlikely event your IRA is invested with an insurance company involved in state insurer delinquency proceedings.
Philippe Lanctot started writing for business trade publications in 1990. He has contributed copy for the "Canadian Insurance Journal" and has been the co-author of text for life insurance company marketing guides. He holds a Bachelor of Science in mathematics from the University of Montreal with a minor in English.