Tax season doesn't start until after the New Year, but that doesn't mean you can afford to wait that long to think about tax matters. The IRS doesn't hesitate to impose penalties when it can, and one of the most draconian provisions of tax law hits a population that can typically afford it the least: those who reached age 70 by June. Those who don't take required minimum distributions from tax-favored retirement accounts like traditional IRAs and 401(k)s by Dec. 31 could face a 50% penalty. Avoiding the penalty isn't hard, but it does require that you get your act together sooner rather than later.

What are required minimum distributions, and why do I have to take them?

Retirement savers get a huge benefit from IRAs and 401(k)s, but lawmakers wanted to put some limits on just how long people could keep money in their retirement accounts. The required minimum distributions (RMDs) rules do this by requiring you to tap your traditional IRAs and 401(k)s in measured chunks over time, regardless of whether you actually need the money for current living expenses.

IRS building with cornerstone next to traffic light showing red.

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The rules governing RMDs say that in the year that you turn 70 1/2, you have to start taking distributions from traditional retirement accounts. In other words, those who turned 70 this year by June or earlier will need to take their first RMD. Those who turned 70 in July or later will have an extra year before they have to worry about distributions. Once you've begun to take RMDs, you'll need to do so each and every year in the future, as well.

If you just reached the key 70 1/2 age, then there's a one-time extension available, giving you until April 1 before you'll have to take that first distribution. For everyone else, taking RMDs by Dec. 31 is mandatory.

How big a penalty are we talking about?

The penalty for not taking a required minimum distribution is high. The IRS calculates the penalty by looking at the amount you should have taken and multiplying it by 50%. Losing half your RMD to a tax penalty is plenty of reason not to put off RMDs beyond the end-of-year deadline.

In order to determine the appropriate RMD amount, you'll need to refer to instructions from the IRS. This IRS worksheet [opens PDF] explains how one's life expectancy is important in doing the calculations, running through the numbers and helping you figure out the appropriate factors to use to come up with the actual minimum distribution amount.

How big an RMD should I take?

Once you have the factor from the worksheet above, take your retirement account balance as of the end of the previous year and then divide it by the factor. That will give you the minimum amount you must take to satisfy the RMD rules.

The gist of the idea is that the factor gives you your life expectancy, and the calculations are set up so that you'll spend your account down gradually over time during your retirement. An example can help here. Say that you're 73 and need to take an RMD from retirement accounts worth $100,000 at the end of 2016. The IRS table says that your life expectancy is 24.7 years. So you'll divide $100,000 by 24.7, and the resulting $4,049 is your RMD for 2017. As you get older, your life expectancy will decline, and you'll need to take a larger fraction of your remaining retirement account balances in order to meet the RMD standards.

Who else has to take RMDs?

Those over 70 aren't the only ones who have to deal with required minimum distributions. Non-spouse beneficiaries who inherited an IRA, 401(k), or other retirement account and qualify for so-called stretch distributions can use life expectancy tables and take annual RMDs.

Does anyone not have to take RMDs?

In contrast to traditional IRAs, those who own Roth IRAs don't have to take required minimum distributions. The laws governing Roth IRAs don't include RMD provisions, so you can keep money in your account as long as you want and keep earning tax-free income until your death. Your heirs will then have to take RMDs from their inherited Roth assets if they choose to use the stretch provisions to extend the life of the Roth account.

If you don't have a Roth IRA, you can convert a traditional IRA or 401(k) to a Roth in most instances. To do so, though, you have to pay income tax on the amount you convert. That's a hefty price for most retirees to avoid RMDs.

Don't lose half your money

Those who spend down retirement assets once they retire typically have little problem meeting the required minimum distribution provisions. For others, though, the threat of a 50% IRS penalty will hopefully be enough to do what they need to do to keep the tax man off their backs.