Traditional IRAs, 401(k)s and similar tax-deferred accounts let your savings grow without tax for decades, but the government eventually wants its share. Required Minimum Distributions, or RMDs, are the amounts you must withdraw each year once you reach a certain age. Understanding the rules helps you avoid one of the costliest penalties in the tax code.
When RMDs begin
The starting age has been raised several times by Congress in recent years, so the age that applies to you depends on your birth year. Check the current rules on irs.gov or with your plan administrator. Your first RMD can usually be delayed until April 1 of the year after you reach the starting age, but doing so means taking two distributions in one tax year, which may push you into a higher bracket.
How the amount is calculated
Each year's RMD is your account balance at the end of the previous year divided by a life-expectancy factor from IRS tables. The factor gets smaller as you age, so the required percentage rises gradually. If you have several IRAs you can total the RMDs and withdraw the full amount from any one of them; workplace plans such as 401(k)s generally require a separate withdrawal from each plan.
Which accounts are affected
RMDs apply to traditional IRAs, SEP and SIMPLE IRAs, 401(k), 403(b) and most other employer plans. Roth IRAs are not subject to RMDs during the original owner's lifetime, which is one reason some retirees convert traditional balances to Roth accounts before the RMD age. If you are still working, you may be able to delay RMDs from your current employer's plan, but not from IRAs.
The penalty for missing an RMD
Failing to withdraw the required amount triggers an excise tax on the shortfall. The rate has been reduced in recent legislation and can be lowered further if you correct the mistake promptly, but it remains one of the harshest penalties retirees face. Most custodians will calculate your RMD for you and can set up automatic distributions.
Using RMDs wisely
An RMD must leave the tax-deferred account, but it does not have to be spent. Many retirees reinvest the money in a taxable account or use it for planned expenses. If you are charitably inclined, a qualified charitable distribution lets you send part of the RMD directly to a charity without counting it as taxable income. A tax professional can help you decide which approach fits your situation.
