How Much Will My RMD Be if I Have $1 Million in My Retirement Account?

You've tucked away $1 million for retirement and understand that you'll have to begin taking required minimum distributions (RMDs) at age 73 (or 75 if you were born in 1960 or later).

As you plan for retirement, though, you're not quite sure how much those RMDs will be. How much must you withdraw from your retirement account each year to satisfy Social Security Administration (SSA) requirements?

The basic formula for figuring your RMD amount boils down to this: Your account balance divided by your life expectancy factor. Here's what that means in plain English.

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Age matters

Let's say you're turning 73 this year. The IRS' life expectancy table gives you a denominator of 26.5. Dividing $1 million by 26.5 yields $37,736. Your RMD for the year is therefore $37,736.

If you were turning 75 this year, your RMD would increase to $40,650, and by age 80, it would be $49,505.

As you grow older, you have fewer projected years to live. This means you're dividing your account balance by a smaller number, resulting in a higher taxable withdrawal amount.

Calculating your own RMD, step by step

If you'd like to calculate the amount you must withdraw, here's how it's done:

1. Locate your account balance on Dec. 31 of the prior year.
2. Make a note of how old you'll be on your birthday in the current year.
3. Look at the life expectancy factor in the appropriate IRS table.
4. Divide your account balance by the life expectancy factor.

Which accounts do RMDs apply to?

You use a retirement account to help you plan for retirement. The government uses RMDs to collect taxes on money you contributed pre-tax while you were working. Here's a list of the types of accounts RMDs cover:

• 401(k) plan
• 403(b) plan
• 457(b) plan
• Traditional IRAs
• Rollover IRAs
• SEP IRAs
• SARSEPs
• SIMPLE IRAs
• Profit-sharing plans

Important things to know about RMDs

The more you know about how RMDs work, the less intimidating they seem. Here are three other facts that may come in handy:

• RMDs are not all you can withdraw: While RMDs represent the least you must withdraw, you can always withdraw more if it's needed.
• They're not kidding about the due date: You don't necessarily have to wait until Dec. 31 of the current year to take your RMD. However, Dec. 31 is a hard deadline, and missing it can result in a 25% penalty on the amount not withdrawn.
• The year you turn 73 (or 75 if you were born in 1960 or later): The first year you're required to make an RMD is the only year it's not due by Dec. 31. If you'd rather wait, you have up to April 1 of the following year to make the required withdrawal. If you do wait, you'll still have another annual withdrawal due by Dec. 31, meaning you'll make two withdrawals in one year. You may want to determine whether taking two withdrawals in one year affects your taxes.

Whether you have a self-employed retirement account or built your account some other way, RMDs are Uncle Sam's way of getting the taxes he's owed. However, RMDs are also a great way to help you finance the life you want to lead in retirement.

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