Tax-deferred retirement savings accounts are a fabulous deal for taxpayers, allowing you to put off paying taxes on the money that goes into these accounts for years or even decades. However, the IRS's generosity only goes so far: after a certain point, the agency wants to get its hands on the taxes you owe for that money. The "certain point" arrives the year after you hit age 70 ½, which is when you will first become subject to required minimum distributions, or RMDs.

RMDs defined

RMDs are pretty much what they sound like: a minimum distribution that you are required to take from your tax-deferred account(s) by the end of every year. You must take your first RMD by April 1 of the year following the year in which you turn 70 1/2. However, it's often wise to take that first RMD during the year in which you turn 70 1/2, because otherwise, you'll have to take two RMDs in the following year (the RMD for the year you turned 70 1/2, which is due by April 1, and the one for the current year, which is due by December 31). Having double RMDs in a tax year can result in exceptionally high income taxes for the year, not to mention the fact that you may not need that much income in a single year. After the first year, you'll need to take your RMD for each year by December 31.

Cash in envelope labeled '401k'


The IRS has worksheets that you can use to calculate your RMD amount for the year, based on your age and on how much you have saved up for each of your tax-deferred accounts. Most retirees will use the Uniform Lifetime table to calculate their RMDs; however, if your spouse is more than 10 years younger than you are and is the sole beneficiary on your tax-deferred account, you'll be required to use the Joint Life and Last Survivor Expectancy table for that account instead.

How to calculate your RMD

If you're using the Uniform Lifetime table to calculate your RMDs, the process is as follows. First, note the balance in your IRA as of December 31 of the previous year. Next, find the row in the Uniform Lifetime table that matches up with your age on your birthday during the current year, and note the number next to your age. This number, which the IRS delicately calls the "distribution period," is your calculated life expectancy (based on actuarial data). Divide the IRA balance by this number, and the result is the amount of your RMD for the year.

If you are required to use the Joint Life table, the process of calculating your RMD is a bit more complicated. This table consists of a series of headers down the left side of the table that indicate your age, and headers going across the top of the table that indicate your spouse's age. Find the point where your age and your spouse's age intersect, and the number in that box is the joint life expectancy for you and your spouse. Divide the balance in your IRA by the joint life expectancy number from the Joint Life table, and the result is the amount of your RMD for the year.

Retirees with multiple tax-deferred accounts have to go through this calculation for each account and note the RMDs separately. However, once you've completed the calculations and know your total RMD for the year, you're not required to split up the distribution between every account you possess. Often it makes more sense to draw the entire RMD for the year from a single account -- typically the one you expect to produce the lowest return in future years -- leaving your other accounts to keep growing and thereby producing more income.

What happens if you don't take your RMD?

Failing to take your RMD for the year comes with some serious (and seriously expensive) consequences. The IRS will charge you a 50% tax on the part of the distribution you failed to take. For example, let's say your RMD for the year was $2500 and you only took $1500 in distributions. In that case, the IRS would charge you a $500 excise tax on the $1000 that you failed to take from your tax-deferred accounts. Clearly, you're better off taking the full RMD and paying the related income taxes even if you don't need the money right now. Why pay the IRS any more than you have to?