When you hit age 70 1/2, the IRA rules require you to start taking withdrawals from your individual retirement accounts. Up until the end of the year after you turn age 70 1/2, you can choose to let your IRA continue to grow tax-deferred. The required minimum withdrawals are based on the IRS version of your life expectancy, so it is possible your account value can continue to increase for a period of years.
Required Minimum Distributions
You cannot let your IRA grow forever, and the tax laws have decided that age 70 1/2 is long enough. At that point, you must start withdrawing at least a minimum amount each you out of your IRA. The RMD amount is calculated by dividing the value of your IRA by your life expectancy in years. You must take the first RMD by April 1 of the year following the year you turned 70 1/2. In the following years, the withdrawal must be taken by December 31.
RMD Calculation Date
The value used to calculate the current year's RMD is the IRA value on December 31 of the previous year. Since the withdrawal doesn't need to be made before December 31 of the current year, your IRA can continue to grow for the full year and the withdrawal amount calculation is based on the smaller, year earlier value. If your IRA has a good year, it might increase by a greater amount than the RMD you have to withdraw.
Life Expectancy Factors
The factor used to calculate your IRA RMD is a life expectancy table published by the IRS in Publication 590: "Individual Retirement Arrangements (IRAs)." Most IRA owners use the Uniform Lifetime Table. For the first RMD, use either the age 70 or 71 factor, depending on which birthday you had during the year. These factors are 27.4 and 26.5, respectively. Dividing 100 by the factor shows what percentage of your IRA you must withdraw. For example, 100 divided by 27.4 equals 3.65 percent. If your IRA increases by more than 3.65 percent during the year, the value will still be greater than the year before, even after taking the RMD.
Getting Older Taking More
How long your IRA can continue to grow depends on the rate of growth or earnings in your IRA account. At age 78 you must take about 5 percent as the RMD. At age 85 you take out almost 8 percent. In your 90s, you must withdraw more than 10 percent per year from your IRA. If you can generate big enough returns in your IRA, it may still grow more slowly for quite a while after age 70.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.