Straight Talk

What the heck is a required minimum distribution?

What is RMD?
What is RMD?

The good news is that you did a great job over the years securing a nice nest egg for your golden years. Now the bad news: You cannot keep retirement funds in your account indefinitely.

For the year you turn 70½ and each year thereafter, the IRS requires that you to begin taking withdrawals from most of your retirement accounts. It's called a required minimum distribution, or RMD.

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These rules apply to traditional individual retirement accounts, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans and profit-sharing plans.

The IRS RMD rules can be a bit confusing, and failing to satisfy your annual RMD can be expensive, costing you an excise-tax penalty of up to 50 percent on the amount not distributed as required, warns Manisha Thakor, director of Wealth Strategies for Women at Buckingham and The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.

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As every individual's situation is unique, Thakor recommends contacting a qualified tax advisor to ensure that you satisfy your annual RMD requirements.

Basically, the IRS requires that owners of tax-deferred retirement accounts begin withdrawing (and paying taxes on) minimum amounts each year upon attaining the age of 70½. Beneficiaries of inherited IRAs must usually begin taking RMDs in the year following the year of the account holder's death.

The federal government allowed you to spend your entire working life socking untaxed income away into these accounts, Thakor said, and the IRS is looking to eventually recoup some of that lost tax revenue at some point. Unless you keep working, that point is currently age 70½.

To make things even more complicated, let's discuss Roth IRAs. You may sometimes hear that Roth IRAs are not subject to RMD. That is not truly accurate. Roth IRAs are not subject to RMD during the owner's lifetime but are subject to RMD after the death of the owner.