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The Low-Down on Required Minimum Distribution and How it Affects You

CaptureWhether you’re thinking about retirement, or you’re currently retired, you have lots of choices to make regarding your IRA, and what’s right for your overall retirement plan.
There is at least one decision though, that the IRS will make for you, and that’s the age that you must begin taking income from your IRA. It’s known as a Required Minimum Distribution or RMD. You may or may not have heard of this before, and if you haven’t, don’t worry, we’ll break it down for you.

When do I start withdrawing funds?

As a general rules, you must take your first RMD by April 1st following the calendar year you turn 70½. If you participate in an employer sponsored plan, your starting year for RMDs is the year you turn 70½ or the year you terminate employment, whichever is later. The RMD deadline for subsequent years is December 31.
For instance, if you’ll be 70½ this March, this is the first year you need to take an RMD. The deadline for doing so, though, is April 1 of next year. You’ll need to take your second RMD by December 31 of that same year, either in a lump sum or in installments.

How is an RMD calculated?

Generally, the required distribution is determined through a formula that involves the amount of your accounts and your life expectancy. If you don’t take the RMD, there are serious penalties that can get up to 50 percent of the amount that you were supposed to withdraw.

What types of accounts do RMDs apply to?

You generally have to take an RMD from any retirement account to which you have made tax-deferred contributions or had tax-deferred earnings. These accounts include:

  • Traditional IRAs
  • 401(k), 403(b) and 457 retirement plans
  • SEP IRAs
  • Inherited beneficiary qualified accounts
  • Pension and profit sharing plans

Roth IRAs are an exception. You are not required to take RMDs from a Roth IRA during your lifetime. The reason Roth IRAs are an exception is because you’ve already paid taxes on your Roth account as you’ve made payments into it.