A first of wave of baby boomers hit a milestone last July. Those oldest boomers, born at the start of 1946, turned 70½ in mid-summer and will be followed at the rate of 10,000 people per day for the next 18 years.
That number, 70½, may seem oddly specific, but that's because the Internal Revenue Service lists that age as the beginning of required minimum distributions, or RMDs.
A required minimum distribution is simply a mandatory withdrawal that you must make annually from your retirement accounts, upon reaching the age of 70½. An RMD is required for an individual retirement account, SIMPLE IRA, SEP IRA or a 401(k) plan.
The RMD is a source of tax revenue for the IRS on tax-deferred retirement accounts.
Roth IRAs are not subject to the lifetime RMD rules since no distributions are required during the lifetime of the owner. However, Roth IRAs are subject to RMD rules after the death of the owner of the Roth IRA, with a 50 percent penalty if such distributions are not made.
The RMDs are based off your account balance from Dec. 31 of the previous year.
"To calculate your RMD, the easiest way is to find an online calculator (i.e. on the IRS website [or] custodians like TD Ameritrade, Charles Schwab, etc. provide them)," said Sara Rajo-Miller, investment advisor at Miracle Mile Advisors. "It is calculated by dividing your account balance by a life expectancy factor, provided by the IRS."
Failure to withdraw the RMD on time could result in a 50 percent penalty.
"You technically have the whole year to take them," said Rajo-Miller. "We generally advise that you wait until the end of the year so it can keep growing, unless you need it to live on." There is an option to defer your first RMD until the next year, but this can result in your paying more taxes the next year, she said.
If you mistakenly don't take your RMD, don't worry. You should simply take out your RMD as soon as you realize, fill out form IRS 5329 and then write a letter to the IRS explaining the situation and why it occurred. Most of the time, you won't have to pay the penalty if you follow these steps, said Carolyn McClanahan, a certified financial planner and founder/director of financial planning at Life Planning Partners.
For many retirees, the RMD may not even be a problem.
"The chances are decent that if they're taking retirement income from their IRA, it'll probably be more than the RMD," said Tim Maurer, a CFP who is wealth advisor and director of personal finance for Buckingham and The BAM Alliance.
In that case, your RMD has been satisfied, Maurer said.
When you're taking the RMD from a 401(k) plan, you must take it out from each 401(k) you have. With an IRA, you can choose instead to pull the lump sum out from just one IRA account, instead of the portion from each one.
If you'd rather not spend the money, you can always reinvest your funds.
Another option is to donate the RMD directly to charity, as this will not count toward increasing your income for the year. If you do this, you "would have to let your broker know," said McClanahan at Life Planning Partners.
"The money has to go directly to charity — you can't take it out and put it in your pocket and then give it to charity," she added. "It has to go to a 501(c)(3), and you are limited to $100,000 a year."
It is also not necessary to wait until you are 70½ to begin pulling your money out of your retirement accounts. You can start doing so at age 59½ penalty-free. This may be a wise move if you are already in a low tax bracket, McClanahan explained.
Many people think they should not touch retirement money until they reach 70½ and that could be a mistake, said McClanahan. If you're in a 0 percent tax bracket or living on savings, this may be a good choice, she said.
"You want to pull enough money out of an IRA because you want to be in the 10 percent or even in the 15 percent bracket if you can," McClanahan said. "That way, you lessen the taxes you'll pay when you reach 70½, based on what you withdraw."
If you have inherited an IRA and you are a non-spouse, then you must begin taking out the RMD in the year following the original owner's death, regardless of your own age, said Rianka R. Dorsainvil, a CFP and founder and president of Your Greatest Contribution.
Dorsainvil said that, if you are a spouse, then you can simply roll the account over into your own, in which case you would begin the RMD when you reach 70½.
"Withdrawing an RMD doesn't have to be a source of major stress for the majority of retirees," said Maurer at The BAM Alliance, adding that, if you keep it simple and remember to take the RMDs out on time, then you should be fine.
— By Natalia Wojcik, special to CNBC.com