The Math of Forced Liquidations

Your annual RMD is calculated by taking your traditional account balances as of December 31 of the previous year and dividing by a life expectancy factor from the Uniform Lifetime Table in IRS Pub. 590-B, “Distributions from Individual Retirement Arrangements (IRAs)”. For example, if you are 74 years old, your life expectancy factor is 25.5. If your pre-tax accounts total $1,000,000 on December 31, your forced distribution for the year is:

This $39,215 is added directly to your ordinary income on Form 1040. If you fail to withdraw the RMD by the deadline (December 31 each year, or April 1 of the year after you turn 73 for your first RMD), the IRS levies an excise tax of 25% on the undistributed amount under IRC §4974(a), “Excise tax on certain accumulations in qualified retirement plans”—though IRC §4974(e) reduces that penalty to 10% if you correct the error within a two-year correction window.

Because RMDs are taxed as ordinary income, they function as an unhedged tax acceleration event that can push you into higher brackets, trigger IRMAA premium surcharges, and increase the taxation of your Social Security benefits.