Being able to postpone paying taxes on the money you contribute to a traditional retirement account (IRA) or defined contribution retirement plan – and on the earnings the accounts generate – is an advantage when it comes to building up your retirement savings. But you can’t avoid paying taxes forever.
REQUIRED MINIMUM DISTRIBUTION (RMD)
Any time you take money out of a tax-deferred retirement account, the portion of the distribution that has not been taxed counts as ordinary income in the year you take the distribution. (Penalties may apply to early withdrawals; distributions from Roth accounts may be tax-free when certain requirements are met.)
But what if you don’t need to take money out? Can you leave it in the account and skip paying the taxes? Not without consequences. The IRS says you must begin taking required minimum distributions (RMDs) after you reach age 70 ½* The penalty for not taking RMDs is stiff: 50% of the amount you should have taken.
WHICH ACCOUNTS ARE SUBJECT TO RMDS?
The RMD rules apply to employer-sponsored retirement plans, 401(k) plans, 403(b) plans, and 457(b) plans. The rules also apply to traditional IRAs and IRA-based plans, such as SEPs, SARSEPs, and SIMPLE IRAs. The RMD rules also apply to Roth 401(k) and 403(b) accounts, but not to Roth IRAs while the owner is alive.
WHEN AND HOW MUCH?
Your first RMD generally will be due by April 1 of the year after the year you reach age 70 ½. Another RMD will be due by December 31 of that same year and each subsequent year. Generally, your RMD is determined by dividing the balance of your account on the prior December 31 by a factor from one of the IRS life expectancy tables.**
RMDs must be calculated separately for each IRA you own, but you can withdraw the total amount from one (or more) of them. RMDs from other types of retirement plans must be taken from each account. You can take more than the minimum if you’d like.
*Some exceptions apply for certain defined contribution plan participants.
**The tables can be found in Publication 590, Individual Retirement Arrangements (IRAs).