For most of your life, your focus will be on putting money into retirement accounts. But when you retire, you'll have to start taking money out. The amount you withdraw from your accounts is largely determined by financial need, but this isn't the only factor affecting your withdrawal rate. For certain types of retirement investment accounts, you're actually required to take money out once you reach a certain age or you can face steep tax penalties.
It's important to understand the rules for mandatory withdrawals, called required minimum distributions, so you don't end up losing a big chunk of money to the government just because you didn't take it out on time.
When do you have to take required minimum distributions?
If you have a traditional IRA, a SIMPLE IRA, a SEP IRA, a 401(k), or a 403(b), you must take required minimum distributions. Until the recent passage of the SECURE Act in December of 2019, you were required to start taking money out of your accounts after reaching the age of 70 1/2. However, the SECURE Act changed the rules for anyone who turns 70 on or after July 1, 2019. If you turn 70 after that date, you don't have to take required minimum distributions until you are 72 years old.
If you have any type of IRA, you must begin taking money out by April 1 of the year after the calendar year when you reach 72 (or 70 1/2 if you were born prior to July 1, 2019). If you have a 401(k) or 403(b), you have to start taking money out at the later of two dates -- either April 1 after the calendar year you reach 72 (or 70 1/2), or April 1 after the year when you actually retire, provided your plan permits you to wait that long.
If you have your money in a Roth IRA, you don't have to take required minimum distributions. You can leave your money invested for as long as you choose.
It can be confusing to figure out how much to take out, but the IRS has a worksheet to help you determine the correct amount. You may also want to talk with your 401(k) plan administrator or a financial advisor to get help determining the amount you're required to withdraw.
What happens if you fail to take out money when required?
If you don't take money out of your retirement account when required, the penalties are harsh. You'll owe a 50% excise tax on the amount you should have withdrawn. If you were required to take out $5,000 and failed to do so, this would mean you'd lose $2,500 to the IRS. You definitely don't want that to happen, as this would mean giving up a huge chunk of your retirement funds for nothing.
Don't let tax penalties eat away at your savings
While it may be annoying to take money out of your retirement accounts on the government's schedule instead of your own, you can't afford to miss a required minimum distribution and end up owing a huge tax penalty. Fortunately, now you know when RMDs begin, so you can make sure to comply and keep your hard-earned money to spend on your wants and needs as a retiree.
Of course, if you're forced to take money out that you don't need to spend, you also have the option to put the cash into a regular investment account or high-yield savings account to watch the money keep growing or to save it for a rainy day.