What Are Required Minimum Distributions?

Required minimum distributions, or RMDs, are annual minimum amounts that must be withdrawn from your retirement accounts after you reach 70-1/2 years of age. RMD requirements apply to pre-tax accounts such as traditional IRAs and most employer-sponsored retirement plans like 401(k) and 403(b) plans.

Required minimum distributions

In setting up the laws governing retirement accounts, Congress set 70 1/2 as the age at which retirement savers would start having to take required minimum distributions out of their accounts. Your first RMD must be taken by April 1 following the calendar year during which you turn 70-1/2. Thereafter, subsequent RMDs have to be taken by Dec. 31 of each year.

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For example, if you reached the age of 70-1/2 in July 2016, you have until April 1, 2017 to take your first RMD. Subsequent RMDs must be taken by the end of each calendar year following the year in which you turn 70-1/2. In the previous example, this means that your second RMD would need to be taken by the end of 2017.

You can choose to take your RMD as a lump sum, or as a series of payments, as long as the entire amount is withdrawn by the end of the calendar year. Also, if you have more than one account subject to RMD requirements, you can take the combined RMD out of just one account, if you choose to do so.

How much do you need to withdraw?

The amount you're required to withdraw each year depends on your account balance(s), as well as the ages of you and your spouse, if applicable.

Using IRS life-expectancy tables, you can find your expected distribution period. Most people use the Uniform Lifetime Table, unless your account's sole beneficiary is a spouse who is more than 10 years younger than you. In that case, case you'll use the Joint Life and Last Survivor Expectancy Table (table 2 in this IRS publication).

To calculate your annual RMD, take your retirement account's balance as of December 31 of the previous year and divide this amount by the distribution period in the appropriate table.

Let's consider an example. Here are just a few of the distribution periods in the IRS's Uniform Lifetime Table:

Source: IRS.

If you're turning 75 years old in 2017 and your retirement accounts' combined balance is $1 million as of December 31, 2016, you would take the distribution period of 22.9 years found in the table, and divide your $1 million balance by this number. Doing so gives you an RMD of $43,668 for the 2017 calendar year.

Two things to be cautious about

The first warning about RMDs applies to first-timers. Just because you have until April 1 of the following calendar year to take your first RMD doesn't mean it's a good idea. If you wait until the last minute to take your first RMD, you'll need to take your second one during the same calendar year.

Since distributions from pre-tax retirement accounts like traditional IRAs and 401(k)s are considered taxable income, taking two RMDs during the same calendar year could catapult you into a higher tax bracket, and end up costing thousands of dollars more than you would have paid had you taken your first RMD during the calendar year in which you turned 70-1/2.

As a final word of caution, be aware that the penalty for not taking your entire RMD is 50% of the amount you should have withdrawn. In other words, if your RMD for 2016 was $40,000 and you only withdrew $20,000, the IRS can penalize you half of the difference, or $10,000.

Under no circumstances should you fail to take your RMD. It's a good idea to double and triple check whether you've withdrawn enough at the end of each year.

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