One of the downsides of the traditional IRA is that you have to start taking distributions at age 70 1/2. Not only that, but the distributions have to be calculated according to a formula created by the Internal Revenue Service. The IRS is so serious about compliance with the required minimum distribution rule that it assesses a hefty penalty for failing to withdraw the correct amount in a given year.
Taxed as Income
Required minimum distributions, like all traditional IRA distributions, are taxed as income. You pay the tax according to your marginal income tax rate for the year. If you are at or near the upper limit of a tax bracket, your RMD might propel you into the next bracket, increasing the amount you'll owe. When you file Form 1040, enter the distribution amount on Line 15.
Missed RMD Penalty
If you do not take all of the RMD out of your traditional IRA by Dec. 31 of a given year, the IRS assesses a 50 percent penalty on the amount you should have withdrawn but did not. You can always ask the IRS to waive the penalty by writing a letter of explanation and mailing it to the agency, along with a check for the overlooked amount.
Although the IRA trustee typically figures the RMD and sends it to you, by law, it is the IRA owner's responsibility to be sure the RMD is distributed timely and in the correct amount. You arrive at the RMD by dividing the previous end-of-year balance by the appropriate figure on an IRS life-expectancy table. Most taxpayers use the Uniform Lifetime Table. Those whose spouses are more than 10 years younger use the Joint Life and Last Survivor Expectancy table. Beneficiaries can find their age-related figures on the Single Life Expectancy Table. It's good practice to calculate the RMD for yourself and check in with the trustee to be sure the sum is disbursed by the deadline.
If the IRA account holder had started taking RMDs before he died, the beneficiary must be sure the RMD for the year in which he died is distributed as usual. It should be calculated using the age and table appropriate to the account holder. If the beneficiary decides to take yearly distributions for herself, she must begin by Dec. 31 of the year following the account holder's death. The beneficiary's yearly distribution is calculated by dividing the end-of-year balance by the figure on the Single Life Expectancy Table that corresponds to her age. If the beneficiary fails to take out her yearly distribution, she will be subject to the 50 percent penalty.