The “deferred” part of tax-deferred retirement accounts doesn’t last forever.
Distributions must be taken from Individual Retirement Accounts (IRAs) starting in the year you turn 70.5 – and from 401(k)s at the same age, unless you’re still working for the employer that sponsors the plan. Congress set it up this way because the tax breaks on these accounts are intended to help people accumulate savings for retirement. The Required Minimum Distribution (RMD) exists to make sure the tax benefits of these accounts don’t extend indefinitely – and that you start using these assets, and start paying taxes, in retirement.
And it’s important to get this right: Failure to take the correct distribution results in an onerous 50 percent tax – plus interest – on any required withdrawals you fail to take.
RMDs must be calculated for each account you own by dividing the prior December 31 balance with a life expectancy factor that you can find in IRS Publication 590. Often, your account provider will calculate RMDs for you – but the final responsibility is yours. FINRA, the financial services self-regulatory agency, offers a , and the IRS offers worksheets to help calculate RMDs.
RMDs must be taken by year-end, with one exception. In the year that you turn 70.5, you have until April 1 to take your RMD. However, doing that means you’ll be taking two distributions in the following year – which could have a significant impact on your income taxes.
Although RMDs are calculated for each IRA you own, you don’t have to take a separate distribution from every account. You could total up your RMDs and take it all from one IRA – one that is a poor performer, perhaps, or one that will help you rebalance an
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