Retirement accounts, such as IRAs and 401(k)s, can be lifesavers, helping us sock away money for our golden years on a tax-advantaged basis. They have rules that need to be followed, though, and failing to do so can be costly.

According to Fidelity Investments, as of a few weeks ago, fully 61% of their account holders were not following a critical rule for traditional IRAs -- taking their full required minimum distributions (RMDs) -- and as a result, they may soon face a penalty.

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Here's a closer look at RMDs and what you need to know about them.

Meet the RMD

If you have all your tax-advantaged retirement money parked in a Roth IRA and not in a traditional IRA or a 401(k), you don't have to worry about RMDs. Many people have all of these accounts, though.

With a Roth IRA, you can leave the money in it to grow (tax free!) over your entire lifetime, and the funds in it don't have to start getting withdrawn until you die. But with a traditional IRA or a 401(k) -- both the traditional 401(k) and the newer Roth 401(k) -- you must start taking money out beginning at age 70 1/2. And you can't just withdraw any sum you want. The IRS has rules about these withdrawals, with required minimum amounts.

Each year, you must withdraw at least your RMD, so greater sums are permitted. The RMD is calculated based on life expectancies and the balance in your account at the end of the previous year. Your IRA or 401(k) custodian (often the financial institution where your account lives, such as Fidelity) will likely inform you of your RMD, while also reporting it to the IRS. That makes things rather easy.

If you're not informed as to the amount of your RMD, contact your account administrator and ask. Alternatively, you can consult the IRS's helpful RMD worksheets and figure it out on your own. You'll find an RMD table, or RMD calculators, at many financial websites, too.

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The RMD Rules

If you withdraw less than you need to in a given year, or make your withdrawal later than the deadline, you might have to pay an excise tax of 50% of the amount you failed to withdraw. In that case, you'll need to fill out IRS Form 5329 and include it with your federal tax return for the year in which you took less than you were supposed to. You can also include an explanation of what happened, as per the IRS, "...the penalty may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall."

For every year in which you must take an RMD, it must be taken by December 31 -- except for your first year. For the year in which you turn 70 1/2, you have until April 1 (not April 15) of the year following that year. In other words, if you turn 70 1/2 in 2017, you have until April 1, 2018 to make your first RMD. For the year 2018, you have until December 31. Note, though, that if you use the allowed delay in your first year, you'll be taking two distributions in the same year, which might boost your taxable income and bump you into a higher tax bracket. Proceed with caution, and run the numbers for both scenarios to see what plan will work best for you.

There are other rules to know, too. For example, with 401(k) plans, RMDs generally start when you turn 70 1/2 or when you retire, if that's later. And those who own 5% or more of a company sponsoring their retirement plan have special rules, too. Any particular retirement plan might have some particular rules about RMDs, so it's worth looking into what the rules are for your particular retirement account.

Your RMDs will usually be taxable as ordinary income for the year in which they're taken, and they may be subject to state or local taxes, too. As the IRS explains, "Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts)."

What to do about your RMDs

It's smart to be strategic with your RMDs. If you have multiple IRAs or 401(k)s, you have some choices to make. With IRAs, you must determine your RMD for each of them, but then you can withdraw that total sum from just one, or several of them, if you wish. (Those with multiple 401(k) accounts must take each account's RMD separately from each account.) For example, if you have three IRAs, and your RMDs from them are $2,000, $3,000, and $5,000, for a total of $10,000, you can withdraw those sums from their respective accounts, or you can withdraw a total of $10,000 from any, or several of them. In this situation, consider withdrawing from the IRA from which you have the lowest growth expectations, or the one that's generating the least dividend and/or interest income.

If your income is lower than usual in a given year, you might withdraw more than the RMD in your accounts. If you expect to have a significantly higher income in the coming years, enough to push you into a higher tax bracket, it might be worth taking more than the RMD, too, while you're still in a lower bracket.

Armed with some knowledge about RMDs, you can avoid being penalized rather severely. Remember -- failing to take an RMD of $8,000 in one year can result in a tax of $4,000! That's a big deal, and well worth avoiding.

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