Your life determines minimum distributions

Q: When I started taking required minimum distributions from my IRAs, I used a withdrawal formula based on dividing the value of my IRA by 27.4. I understood that this value would have to be withdrawn annually until the IRA was depleted. Of course the RMD is taxed at my current tax rate. During a recent discussion with others who are taking RMDs, I was told their withdrawals varied from year to year. I don't understand how that can happen.

Also, I am currently paying taxes on my RMD at the same tax rate I was paying before retirement because I no longer can benefit from itemizing deductions. If, as some of the presidential candidates are planning, tax rates are increased, I will be paying more taxes on my IRA than I would have paid when I invested the money. Have you heard of any efforts to ensure that taxes on RMDs are fixed? - C.B., Carrollton, Texas

A: Required minimum distributions from qualified accounts are roughly based on your life expectancy. I say roughly because your life expectancy will vary significantly depending on your sex and race, while the RMD table from the IRS is a single unisex table. The table also allows generous room for the 50 percent who live longer than their life expectancy and for the joint expectancy of couples.

According to a life expectancy table used by the trustees of the Social Security system, for instance, a 70-year-old has a life expectancy of 13.27 years. The IRS table for required minimum distributions has a distribution period of 27.4 years for the same age. Divide the distribution period figure into 100 and you get the percentage of your account that must be distributed for the first RMD, 3.65 percent.

Your life expectancy doesn't remain constant. For each additional year, your expectancy decreases. But it doesn't decrease by a full year. From 70 to 71, for instance, the Social Security table says your expectancy declines to 12.64 years. That's a loss of 0.63 percent of a year rather than a full year. Your distribution period also declines. From 70 to 71 it falls to 26.5, indicating a distribution of 3.77 percent.

By age 80 the distribution period is down to 18.7 years, a distribution of 5.3 percent. (Your life expectancy at the same time is down to 7.62 years, so it can't be argued that you're being unreasonably pushed.)

The longer you live, the greater the RMD as a p ercentage of your remaining account value. At age 95, when 97 percent of all people born in America can expect to be dead, your RMD is 8.6 years, dictating an 11.6 percent distribution.

One side effect of growing account values and shrinking distribution periods is that many retirees, like you, are finding that their tax rate in retirement is as high as when they were working. Worse, many are paying taxes on their Social Security benefits, making the effective tax rate much higher than when they were working.

I know of no attempts to fix tax rates on RMDs, but there have been several unsuccessful efforts to limit the taxation of Social Security benefits.

scott@scottburns.com

ˆÂ©2008 Universal Press Syndicate