Can someone please explain IRA and RMD to me?

If you own an IRA, eventually you will need to start taking Required Minimum Distributions (RMD) from your IRA, unless it is a ROTH IRA.  ROTH IRAs do not require RMDs as they were funded with after tax money and therefore enjoy special treatment under the tax code.

The following chart pulled from the IRS website may be helpful in understanding the rules for RMD.  The italicized remarks are our comments on the IRS information.

  1. IRA required minimum distributions

If you’ll be age 70½ or older by the end of current taxable year, you must withdraw a minimum amount — a required minimum distribution (RMD) — from your non-Roth IRAs for the current tax year. Withdrawals are not required from Roth IRAs until after the owner’s death.

This means that in whatever year the IRA owner turns 70 years and 6 months old, the IRA owner must withdraw an RMD from the IRA for that tax year.  Typically, this is done by December 31st in the appropriate year.  As you will see from the next paragraph, you may delay the distribution for three months as stated below.

  1. RMD deadline

You must take your current year RMD by December 31st of the year.  If you reached 70 years and 6 months of age this year, you can delay taking your this-year RMD until April 1st of next year.

This paragraph modifies the general RMD requirements that a RMD must be taken by the end of the year in which the IRA owner turns 70 years and 6 months old.  This provision gives the IRA owner until April 1st the year after the IRA owner turns 70 years and 6 months old to withdraw the RMD.  

RMD amount

Your RMD is your account balance as of the end of last tax year divided by a distribution factor from the IRS’s “Uniform Lifetime Table.” A separate table is used if your spouse is your sole beneficiary and is 10 or more years younger than you. You can use the chart below to calculate your RMDs.

The way to use the chart below is to take the age of the IRA owner and identify the Distribution Factor given in the chart.  Then determine the balance of the IRA account in question at the end of the last taxable year. Once you have the IRA account balance you divide it by the Distribution Factor.  The quotient is what you must withdraw.

Example: A 70 year old would divide lasts years IRA ending balance by 27.4.  The quotient is the amount that must be withdrawn to avoid penalty.