You Can’t Take it With You…Understanding RMDs

You’ve spent years saving for retirement in your 401K, IRA or other qualified plan, but you can’t keep those funds in your account indefinitely. Once you’re 70½ years old, you must start withdrawing money out in what’s called “Required Minimum Distributions,” or RMDs.

And it’s not quite as simple as taking a little cash out and calling it a day. If you don’t take out enough, you’ll be penalized by the IRS. Here’s what you need to know to take your distributions wisely.

What is an RMD?
An RMD is the mandated amount that must be withdrawn from qualified retirement accounts, such as 401Ks and IRAs, starting in the calendar year that the owner turns 70½.Happy Couple

Who needs to take them?
Anyone who is older than 70½ with an IRA, SIMPLE IRA, SEP IRA, or retirement plan account like a 401K.

Why do these requirements exist?
The government wants their share of the taxes that were deferred to help you save for retirement. You used pre-tax money to fund your qualified plan so at 70½, the government figures it’s time you paid the taxes you owe.

In comparison, Roth IRAs are exempt from lifetime RMDs. Why? Because they are filled with post-tax money, and no money needs to be taken out until the owner dies.

How much do I need to take?
That depends on the value of your accounts and your age. You can use the IRS Uniform Lifetime Table to do that calculation. If your spouse is more than 10 years younger, you would use the Joint Life Expectancy Table, which can lower your RMD. These tables and a worksheet are available at

What about taxes?
close - up U.S. income tax form
If you used pretax money to fund your retirement account, this is the time that the government gets its tax money. RMDs are classified as ordinary income and are taxed accordingly.

Are there exceptions?
Yes. In the calendar year you turn 70½, you can defer your RMD until April 1 of the following year, but you will need to take a second RMD in that year. If you are 70½ and still working and contributing to a 401k plan, you don’t have to take an RMD until you retire.

What happens if I don’t take an RMD?

If you don’t withdraw the amount the IRS tells you is required to meet your RMD, you could be taxed up to 50 percent tax on the amount not withdrawn. Ouch!

Understanding your tax liability before you hit retirement will give you the greatest financial flexibility. We need to pay our taxes, but it can affect your retirement plans you end up paying more than your fair share.