All about RMDs

With few exceptions, the money in your retirement plans can't grow tax-deferred indefinitely. You must start to withdraw money from most plans by April 1 of the year following the year you attain age 70 1/2. Thereafter, you must continue to withdraw money at least annually. If you fail to take the money out in a timely manner, or if you take out less than is required by the rules, you'll owe an IRS penalty equal to 50% of the amount that should have been withdrawn. And you would still have to withdraw the correct amount and pay the appropriate taxes. It is relatively easy to run afoul of the rules dictating required minimum distributions, since the minimums can be quite difficult to calculate.

The required minimum distribution rules apply to most types of retirement plans, including:

  • Traditional IRAs
  • SEP-IRAs
  • Keogh plans
  • 401(k) and other types of qualified plans
  • 403(b) plans
  • SIMPLE plans

You may withdraw more than the minimum in any given year, but you get no "credit" in future years for additional amounts taken in earlier years. The minimum distribution that you must take is based on your life expectancy or, if you choose, on the joint life expectancy (officially the "joint life and last survivor expectancy") of you and your oldest primary beneficiary. The younger your beneficiary, the longer the joint life expectancy and the less you will be required to take from your retirement plans. (However, to prevent you from skirting the minimum distribution rules, there are limits to the life expectancy you can use for a beneficiary other than your spouse.)

By using a joint life expectancy, you can substantially reduce the amount of the required minimum distribution from your retirement plans. For example, consider the case of a 70-year-old retiree who has a single life expectancy, under IRS tables, of 16.0 years. This person would be required to withdraw a minimum of 6.25% of her retirement plan assets for the year. On the other hand, a 70-year-old with a 66-year-old spouse who has been designated primary beneficiary of the retirement assets would have a joint life expectancy of 22.5 years, and would have to withdraw only 4.44% of the retirement plan assets. The joint life-expectancy guidelines and tables are contained in IRS Publication 590, Individual Retirement Arrangements, which you can order at no charge by calling the IRS at 1-800-829-3676.