How to Calculate Required Minimum Distributions

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IRAs and 401(k)s are a mainstay of retirement planning, but there are some important rules to remember about them. For example, like most retirement accounts, both are subject to required minimum distributions (RMD) after the account owner reaches age 72.

If you're nearing the IRA withdrawal age, you may already be familiar with some of these rules. Whether you're new to them or simply refreshing your memory, let's take a moment first to understand IRA minimum distributions and how they're calculated.

What's the required minimum distribution?

Before answering, "how do I calculate my required minimum distribution," understand that most retirement accounts are subject to minimum distributions (Roth IRAs are an exception). After the account owner has reached the required minimum distribution age of 72, they must begin to withdraw a set minimum amount from these accounts annually. 

You can withdraw more than the minimum. However, if you don't withdraw the minimum amount, it's taxed at 50%. What you do with the withdrawn money is up to you. You can even re-invest it, although if you've maxed out your retirement account contributions, you may need to find an alternative investment vehicle. Some people use permanent life insurance policies for this purpose, as these plans include a cash value investment feature.

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How to calculate required minimum distributions for retirement accounts

While the company that manages your retirement account may inform you of your minimum IRA withdrawal, the legal responsibility is ultimately yours. The same is true of your 401(k) RMD. As a result, understanding how to calculate the minimum withdrawals for your retirement accounts can be essential. There's no official IRS IRA RMD calculator. However, the IRS does have worksheets and required minimum distribution tables to help accountholders determine these withdrawal amounts. 

Depending on your circumstances, you'll use one of the three different tables that show what the IRS distribution period is for you. To calculate your minimum distribution, divide your account balance from the end of the previous calendar year by the appropriate distribution period. 

Most account owners will use the first table, called the Uniform Lifetime Table. If you're a beneficiary of the account owner but not their spouse, then you'll use the Single Life Expectancy table. If you're the account owner, and your spouse is both ten years (or more) younger than you and is your sole beneficiary, then you'll use the Joint Life and Last Survivor Expectancy table

This process may feel overwhelming the first time, but once you've gone through it once, these tables and worksheets become easier to use. If you're dealing with multiple types of retirement accounts, you'll need to follow the different rules for each. The IRS breaks down these guidelines by retirement type, amongst other factors.

Life insurance for retirement

Life insurance is one of many tools people use in retirement planning. Life insurance policies can fill multiple niches in a retirement plan, whether as a safety net for your family, your business, or as an investment vehicle. At Ethos, we have policies tailored to adults at their various life stages. Get a free quote online and see which policy is right for you.

If you're tax-curious and wondering if life insurance can be a business expense, know that similar rules govern it as other business expenses. If the policy is for employees, it may be treated as a business expense, depending on your business's classification. But when you're looking for a personal life insurance plan, it's unlikely to qualify. 

However, there are types of life insurance that have tax-advantaged investment components. Whole life, for instance, offers guaranteed growth and tax-deferment on gains earned through the cash value feature. Policyholders can take loans from their policies. These loans can be maintained tax-free in some situations, but avoiding the pitfalls can be complicated.

If you're considering minors as your beneficiaries, you may be interested in life insurance trusts. These trusts allow the policyholder to specify ahead of time how and under what circumstances the policy payout can be used. The policyholder can set the terms and conditions for managing the death benefit. Doing so can allow you to leave the payout to your children even if they're minors or otherwise unable to manage their finances.

The information and content provided herein is for informational purposes only, and it is not to be considered legal, tax, investment, or financial advice, recommendation, or endorsement. You should consult with an attorney or other professional to determine what may be best for your individual needs.

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