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What Is a Required Minimum
Distribution?
A required minimum distribution (RMD)
is the annual amount that must be withdrawn from a
traditional IRA or a qualified retirement plan [such
as a 401(k), 403(b), and Keogh] after the account
owner reaches the age of 70½. The last date allowed
for the first withdrawal is April 1 following the
year in which the owner reaches age 70½. Some
employer plans may allow still-employed account
owners to delay distributions until they stop
working, even if they are older than 70½. RMDs are
designed to ensure that owners of tax-deferred
retirement accounts do not defer taxes on their
retirement accounts indefinitely.
You are allowed to begin taking
penalty-free distributions from tax-deferred
retirement accounts after age 59½, but you must
begin taking them after reaching age 70½. If you
delay your first distribution to April 1 following
the year in which you turn 70½, you must take
another distribution that year. Annual RMDs must be
taken each subsequent year prior to December 31.
The RMD amount depends on your age,
the value of the account, and your life expectancy.
You can use the IRS Uniform Lifetime Table (or the
Joint and Last Survivor Table, in certain
circumstances) to determine your life expectancy. To
calculate your RMD, divide the value of your account
balance at the end of the previous year by the
number of years you’re expected to live, based on
the numbers in the IRS table. You must calculate
RMDs for each account that you own. If you do not
take RMDs, then you may be subject to a 50% federal
income tax penalty on the amount that should
have been withdrawn.
Remember that distributions from
tax-deferred retirement plans are subject to
ordinary income tax.
Waiting until the April 1 deadline in
the year after reaching age 70½ is a one-time option
and requires that you take two RMDs in the same tax
year. If these distributions are large, this method
could push you into a higher tax bracket. It may be
wise to plan ahead for RMDs to determine the best
time to begin taking them.
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