If you have a Traditional IRA, then you won’t be allowed to make contributions anymore once you reach the year in which you turn 70.5. In addition, while you may opt to start taking distributions without penalty at age 59.5, you will be forced to take distributions the year after you turn 70.5.
These forced distributions are called Required Minimum Distributions (RMDs). Your IRA custodian—the bank or brokerage firm that holds the account—will generally calculate the amount of your IRA and remind you to take it by April 1 of the year that follows the one in which you turn 70.5.
To find your RMD, your IRA custodian will look at the ending balance for your IRA on December 31 of the prior year. They will take that number and divide it by the life expectancy table number based on your age and, if your sole IRA beneficiary is a spouse, the age of your beneficiary.
For example, let’s say the balance of your IRA last year was $100,000. You are 80 and your spouse, who is the sole beneficiary of your IRA, is 70. According to the tables for joint and last survivor life expectancy, your balance must be divided by a factor of 18.7, resulting in an RMD of $5,347.59.
You might be wondering why a Traditional IRA forces you to take a distribution and what the life expectancy has to do with it. Traditional IRAs are funded with tax-deferred contributions that are permitted to grow tax-free. But these accounts are not intended to act as permanent tax shelters for legacy creation—they are meant to provide an income for your retirement. Therefore, the IRA requires distributions—which are taxable—to be taken at a point they have deemed reasonable. By using life expectancy tables, they can work to ensure that the funds last your whole life, but are not stashed away untouched, and untaxed, for that entire period.
Roth IRAs, which do not feature tax-deductible contributions and are not taxed upon distribution, do not have a forced RMD, which can make them a fantastic tool for legacy planning and preservation.