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Approaching Retirement? Time to Learn About RMDs   


If you’re approaching retirement, now is a great time to learn about taking required minimum distributions (RMDs) from individual retirement accounts (IRAs) and 401(k) plans.


The Basics

Generally, the contributions you make to a traditional IRA or 401(k) plan, along with any investment earnings your accounts generate, are tax-deferred.* But you can’t postpone paying tax on that money forever. When you take a distribution from your IRA or 401(k) plan, the previously tax-deferred amounts become taxable to you as ordinary income. The IRS generally requires that you start taking annual RMDs — and pay the associated taxes — when you reach age 70½.

Take by the Deadline

Your first RMD generally will be due by April 1 of the year following the year in which you turn 70½. Another RMD will be due by December 31 of that same year and each subsequent year.

Calculate the Amount

Generally, an RMD is calculated for each account by dividing the prior December 31 balance of that IRA or 401(k) account by a life expectancy factor from an IRS table. For multiple traditional IRAs, you must calculate the RMD separately for each IRA you own, but you can take the total RMD amount from one or more of them. (The RMD rules do not pertain to Roth IRAs while the owner is alive.) RMDs from 401(k) plans must be taken from each account. You can withdraw more than the minimum amount, but you cannot apply the excess to a future RMD.

Since you are ultimately responsible for calculating the RMD amount (although the IRA custodian or retirement plan administrator may do it), review your calculation with your financial professional to ensure you are withdrawing the correct amount.

Avoid the Penalty

Failure to take an RMD can trigger an additional 50% tax on the amount you should have withdrawn but didn’t. For example, if you missed taking a required distribution of $6,000, you could have to pay a $3,000 penalty.

* Some retirement plans also offer a Roth contribution option. Unlike pretax contributions, Roth contributions do not offer immediate tax savings. However, qualified Roth distributions are not subject to federal income taxes when all tax law requirements are met. Unlike Roth IRAs, these designated Roth accounts are subject to the RMD rules.