What are Required Minimum Distributions (RMDs)?

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One of the best things you can do for your future is to use a tax-advantaged retirement account to save for the future. Your retirement plan can put you ahead in your finances, and ensure that you have the money you need for a comfortable retirement. And if you plan your retirement really well, you can put off needing to withdraw funds for a good long time.

However, with most retirement accounts, the requires you to start withdrawing money from your account — even if you don’t need it. The money that you are forced to take from your retirement account is known as a Required Minimum Distribution (RMD).

While you don’t have to take RMDs when you have a Roth IRA, you do have to take them from Traditional IRA and other non-Roth IRA accounts, as well as from all 401(k) and 403(b) accounts.


When Do You Have to Take RMDs?

Required Minimum Distributions

Your RMDs come on an annual basis. The amount that you are required to withdraw is figured based on the balances of your qualified retirement accounts and the amount of time you are expected to live. Each year, you figure out how much you are supposed to withdraw, and you need to take that amount, or face a penalty.

The first RMD is generally supposed to be taken by April 1 following the calendar year you turn 70 1/2. So, if you end up turning 70 1/2 in February of 2013, you don’t have to take your first RMD until April 1, 2014. However, Your following RMDs must be taken by December 31 of each year. In our example, your second RMD would still be paid in 2014, by December 31. You can take distributions a little at a time, throughout the year, or you can take them all at once.

Each year, you need to take your RMD by December 31. If you don’t you will be assessed penalties. The penalty can be up to 50% of the amount of money you were supposed to withdraw. You can see how not withdrawing the minimum as required can become a problem.

In many cases, if you are still working when you turn 70 1/2, you can put off taking RMDs. Check with a professional to determine whether this applies to you.


RMDs and Multiple Accounts

If you have multiple retirement accounts, it’s important to first figure how much your RMD will be for each account separately. However, if you have multiple IRAs you can combine your RMDs.

Once you have figured out how much you need to take for each account, you can combine that amount, and take it all from one account, or any combination of IRA account, with the exception of an inherited IRA. RMDs from an inherited IRA must be treated separately from all your other IRAs.

This doesn’t work with other types of accounts, though. You will need to make sure that you take your RMDs from other qualified retirement accounts separately.


Your Taxes and RMDs

Realize that you need to pay taxes on the income from your RMDs, with the exception of Roth 401(k) and Roth 403(b) accounts. Before you begin taking RMDs, it is a good idea to plan ahead with a tax professional, since RMDs can boost your taxable income.

Consider strategies, like converting to a Roth IRA, or to an annuity, and consider those tax consequences, before you make a decision about how to proceed.

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