Under the federal tax code, you must begin to withdraw funds from your individual retirement accounts when you reach the age of 70 1/2. The Internal Revenue Service dictates the amount of the withdrawals. You can expect to pay significant tax penalties if you fail to take the required minimum distributions, or RMDs.
Required Minimum Distributions
Your earnings are subject to federal income tax. You can reduce your taxable income by investing some of your wages in an IRA. Both your original investment and the account earnings grow with taxes deferred until withdrawal. IRAs provide tax benefits because you're saving money for your retirement years. Required minimum distribution rules exist to prevent you from permanently avoiding income tax. You may have less income as a retiree than you had during your peak earning years. This could mean dropping into a lower tax bracket. If so, you end up paying less in taxes when you take RMDs than you would have if you had never invested in an IRA.
RMD withdrawal calculations are based on actuarial tables that take into account your age and your IRA balances. The IRS also factors in your spouse's age if you're at least 10 years older than him. At age 70 1/2, the IRS assume a life expectancy of another 27.4 years. Your RMD is calculated by dividing your account balance into roughly equal annual withdrawals designed to last for that period. However, RMD calculations are reset every year based on a gradually reduced life expectancy timeline. At age 115, and every year thereafter, your RMDs are recalculated annually on the assumption that you will live for another 1.9 years.
You must make your first withdrawal no later than April 1 in the year following the year in which you reached the age of 70 1/2. April 1 falls just 14 days before the tax filing deadline for the previous year. The IRS allows IRA contributions for the prior year right up until April 15 of the current year. For all years after you turn 70 1/2, you must make your withdrawals between Jan. 1 and Dec. 31 of the current calendar year.
Your RMDs are subject to ordinary income tax, but if you fail to take an RMD, you have to pay a 50 percent tax penalty. The penalty is based on the dollar amount of the RMD. For example, if you were supposed to make a $5,000 withdrawal, you have to pay a $2,500 tax penalty. You can't avoid or delay RMDs even if you funded a traditional IRA with after-tax earnings. However, RMDs do not apply to Roth IRAs. Unlike traditional IRAs, Roths are entirely funded with income that's already been taxed.
- IRS: Traditional IRAs
- IRS: Retirement Topics -- Required Minimum Distributions (RMDs)
- IRS: Retirement Plans FAQs Regarding Required Minimum Distributions
- IRS: IRA Required Minimum Distribution Worksheet
- IRS: IRA Required Minimum Distribution Worksheet With Spouse 10 Years Younger
- FINRA: Required Minimum Distribution Calculator