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RMD 2013: Get It Done Within 6 Days, or You'll Pay Big

Dan Caplinger
December 26, 2013

The biggest benefit of retirement accounts like IRAs and 401(k)s is not having to pay tax on your earnings until you withdraw money from your account. But most people who were 70 or older before June 30 of this year have to start taking money out of their IRAs. Not taking your required minimum distribution, or RMD, in 2013 could cost you plenty.

Why you might have to take an RMD in 2013
The idea behind the required minimum distribution is that it puts a limit on your ability to defer taxes in your retirement account. When lawmakers created IRAs and 401(k)s, they knew many investors would never want to pay tax on that money, waiting until the last possible moment to take withdrawals. That's why the RMD rules force you to take withdrawals after a certain age, even if you don't need them.

RMD rules are a bit complicated, as they apply to those who are age 70 and a half or older by the end of the year. Most people are required to take their RMDs by Dec. 31 each year, but if you've just turned 70 and a half in the past year, you get a one-time break to wait until April 1 of 2014.

There's another group of people who have to take RMDs: those who have inherited an IRA. Usually, you have to take a required minimum distribution from an inherited IRA, regardless of your age.

How much you have to take out
Once you figure out that you're required to take a minimum distribution, the next step is to figure out how much you have to withdraw. The amount is based on two important numbers: the balance in your retirement account as of the end of last year and your life expectancy as provided by the IRS.

Life expectancy is based on age and changes from year to year, but the percentage of your total balance that you have to withdraw goes up every year. As this IRS table (link opens PDF) shows, those who just turned 70 have to take about $3.65 for every $100 they had in their retirement accounts at the end of 2012, while those who are 80 years old have to take about $5.35 for every $100.

What if you don't take your RMD in 2013?
If you miss the deadline for taking your RMD, the IRS imposes a harsh penalty: 5