After saving for decades, retirees are often surprisingly hesitant about withdrawing money out of their retirement accounts. But after a year's reprieve during 2009, most of those who are 70 or older will have to start taking distributions from their IRAs and 401(k) accounts before the year ends, or else they'll have to pay draconian tax penalties.

A great benefit ... at a price
When Congress first created retirement accounts, it did taxpayers a huge favor. Traditional IRAs and 401(k)s let you defer having to pay any tax on contributions and the income they generate until you start taking money out of your account. That feature not only saves you the headache of dealing with reporting income and capital gains on retirement account assets, but it also gives you a big incentive to leave that money untouched for as long as possible.

However, because lawmakers wanted people to actually use their retirement accounts for, well, retirement, they included provisions that would force people to start taking money out of their accounts, regardless of whether they actually needed to. These provisions are known as the required minimum distribution (RMD) rules.

Are you calling me old?
In another example of strange and obscure tax law, the RMD rules set the age at which you have to start taking money out of your retirement accounts at 70 1/2. That means if you'll be 70 or older on June 30, you'll need to withdraw a portion of the money you have in IRA and 401(k) accounts.

Most people have to take withdrawals by Dec. 31 each year. If you've just reached the magic 70 1/2 age this year, then you get a one-time extension until next April 1 to take your 2010 withdrawal.

In addition, some younger people have to take RMDs. In particular, if you've inherited an IRA or 401(k) and didn't qualify as a spouse to roll it over into an IRA in your own name, then you have to meet the RMD rules even if you're nowhere near age 70 right now.

What's the right amount?
Unfortunately, this is where things get complicated. The minimum amount you have to take varies by age and is based on your life expectancy, which you'll find in some lengthy tables published by the IRS. Although your exact figure will change every year, a rule of thumb is that those in their 70s need to take somewhere in the neighborhood of 4% to 5%. As you get older, the amount increases.

Some may be confused by the fact that they didn't have to take RMDs last year. Under a unique exemption, lawmakers suspended the RMD rules in 2009 because of the stock market's plunge. But RMDs are back with a vengeance this year.

An added complication is that if you're still working, your current job 401(k) plan assets aren't included in this calculation. Any IRAs and 401(k)s from former employers, however, do count toward the total.

If you fail to take enough money out, then the IRS hits you with a 50% penalty on the amount you should have taken out. That means that those in their 90s could lose 5% or more of their entire retirement account balance in penalties if they forget to take their RMD.

Get ready for it
If you're fully invested, then coming up with the cash to take an RMD can put you in an awkward situation. Here are some things you can do now:

  • Go for dividends. One of the best ways to generate cash for an RMD is by investing in dividend stocks. Procter & Gamble (NYSE: PG), Johnson & Johnson (NYSE: JNJ), and Coca-Cola (NYSE: KO) are all household names with the dividend pedigree to make even the most nervous investors comfortable. And with yields above 3%, they'll pay more income than bank CDs and most bonds right now, getting you much of the way toward collecting enough cash for your RMD. Some higher-yielding investments, including Annaly Capital Management (NYSE: NLY) and Apollo Investment (Nasdaq: AINV), have yields that are so high that they'll more than cover their share of your distribution.
  • Take profits on big gainers. The RMD amount is based on the value of your assets at the end of last year. So stocks that scored big gains might be worth trimming, especially if their prospects aren't as good now. For instance, Baidu (Nasdaq: BIDU) and Overstock.com (Nasdaq: OSTK) have soared recently. But some believe Baidu has reached the saturation point in China. Similarly, Overstock.com had a huge quarter during the holiday season, but it still hasn't seen much growth from pre-recession levels. Selling similar stocks after nice runs could help you raise cash for your RMD.

RMDs can be annoying, especially if you don't need the money. But with the cost of forgetting so high, you can't afford not to take your withdrawal. If you plan for taking RMDs, they don't have to create a huge problem with your investments.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.

Fool contributor Dan Caplinger doesn't begrudge his mom for making him learn the RMD rules in all their glory. He doesn't own shares of the companies mentioned in this article. Coca-Cola is a Motley Fool Inside Value pick. Baidu is a Motley Fool Rule Breakers choice. Johnson & Johnson, Coca-Cola, and Procter & Gamble are Motley Fool Income Investor picks. Motley Fool Options has recommended buying calls on Johnson & Johnson. The Fool owns shares of Coca-Cola and Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy never forgets.