If you have a retirement account, like a 401(k) or a traditional IRA, then you need to know about Required Minimum Distributions (RMD’s). Generally speaking, starting when you reach age 70 ½ (or when you retire, if that’s later), you’ll have to withdraw a certain amount each year from your retirement account.
How much do you have to withdraw? This depends on the balance in your account and your life expectancy. Each year, you take the balance of your account on December 31st of the prior year, and multiply it by a life expectancy factor provided by the IRS. The result is the amount you have to withdraw from your account by the end of the year.
What if you don’t take a Required Minimum Distribution? If you don’t take the full amount of your RMD, or if you miss the deadline, then you’ll pay tax at a rate of 50% on the amount of your RMD left in your retirement account . Of course, you can always withdraw more than your Required Minimum Distribution.
What about account beneficiaries? If you die before you have to start taking RMD’s, then different rules will apply to the beneficiaries of your account. They’ll have to withdraw all the money in the account either: within 5 years of your death, or over the expected lifetime of the beneficiary, starting no later than one year after your death.
What accounts are not subject to RMD rules? While traditional IRA’s are subject to RMD rules, there’s no Required Minimum Distribution for a Roth IRA, as long as the owner of the account is alive.