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Required Minimum Distributions (RMDs) and what they mean

You've spent years saving for retirement, but you can't keep those funds in your account indefinitely. Generally, once you're 73* years old, you need to start pulling money out in what's called required minimum distributions, or RMDs.

And it's not quite as simple as taking a little cash out of the account. If you don't withdraw enough, you can be penalized by the IRS. Here's what you need to know to take your distributions wisely.

What is an RMD?

RMDs are the minimum amounts you must withdraw from your pre-tax, tax-deferred IRAs and retirement plans and accounts each year to satisfy federal tax rules once you reach RMD age.

Who needs to take them?

Anyone who is older than 73 with an IRA, SIMPLE IRA, SEP IRA or retirement plan like a 401(k), 403(b), 457(b), profit-sharing plans and other tax-qualified pension or retirement plan.

Why do these requirements exist?

RMDs are required from most types of tax-qualified retirement plans and accounts because they are funded with pre-tax money. Federal law requires you to begin withdrawing money to ensure that savings which have benefited from tax-deferred growth are eventually drawn down and taxed, while providing you with retirement income.

How much do I need to take?

That depends on the value of your accounts and the ages of you and your spouse. Your RMD amount varies by year and is calculated annually by dividing the account balance by your life expectancy. You should consult your financial professional or refer to ".

What about taxes?

If your contributions to a retirement account were tax deductible, the amount of your RMD is considered ordinary income and will be taxed at your current income tax rate. This means that RMDs from traditional retirement accounts, like IRAs or 401(k)s, are taxed as ordinary income because the contributions were made with pre-tax dollars.

Are there exceptions?

In the calendar year you turn 73, you can defer your RMD until April 1 of the following year, but you will then be required to take two RMDs in that same year. If you are still working at 73 and contributing to a 401(k) plan, you don't have to take an RMD until you retire. Also, since Roth IRAs are funded with post-tax money, withdrawals aren't required until the death of the owner.

What happens if I don't take an RMD?

If you fail to withdraw any part of your RMD by the due date, that amount may be subject to a tax penalty of 25%.

The takeaways?

Understand the kinds of retirement accounts you have, and remember when you turn 73, you're required to take money from the ones funded with pre-tax dollars, with a couple of exceptions. If you don't take enough money out of your account, or if you don't withdraw any at all, you can be penalized by the IRS. Finally, work with your financial professional to ensure you follow IRS rules and determine which retirement income plan can help you retire your way.

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Any information regarding taxation contained herein is based on our understanding of current tax law. The tax and legislative information may be subject to change and different interpretations. We recommend that you seek professional legal advice for applicability to your personal situation.

*Historically, federal tax law has set the required beginning age for RMDs at age 70 陆. However, recently enacted federal legislation increases the required beginning age for those born on or after July 1, 1949, to age 73. If you were born before July 1, 1949, your required beginning age for taking RMDs remains age 70 陆.