Reaching your 72nd birthday is cause for celebration. But thanks to a quirky tax code, a potentially more important milestone arrives six months later. IRS rules say that you must begin taking required minimum distributions (RMDs) from your IRAs and other tax-deferred retirement accounts beginning in the year you reach age 72.1
Failure to make these mandatory withdrawals by Dec. 31 each year can result in severe penalties, so if you or someone you know is approaching that threshold, read on.
Congress created IRAs, 401(k) plans and other tax-deferred retirement accounts to encourage people to save for their own retirement. You generally contribute "pre-tax" dollars to these accounts (except for Roth plans), which means the money and its investment earnings are not subject to income tax until withdrawn.
In return, Congress decreed that RMDs must be withdrawn—and taxed—each year after you reach age 72. Furthermore, unless you meet certain narrow conditions, you'll have to pay an excess accumulation tax equal to 50 percent of the RMD you should have taken—plus take the distribution and pay taxes on it.
In a few cases, you can delay or avoid paying an RMD:
- If still employed at 72, you may delay RMDs from your 401(k) or other work-based account until you actually retire, without penalty; however, regular IRAs are subject to the rule, regardless of work status.
- Roth IRAs are exempt from the RMD rule; however, Roth 401(k) plans are not.
Another way to circumvent the RMD is to convert your tax-deferred accounts into a Roth IRA. You'll still have to pay taxes on pre-tax contributions and earnings, and, if you're over age 72, you must first take your minimum distribution (and pay taxes on it) before the conversion can take place.
Ordinarily, RMDs must be taken by Dec. 31 to avoid the penalty. However, if it's your first distribution, you may wait until April 1 of the year after turning 72—although you still must take a second distribution by Dec. 31 that same year.
Generally, you must calculate an RMD for each IRA or other tax-deferred retirement account you own by dividing its balance at the end of the previous year by a life expectancy factor found in one of the three tables in Appendix C of IRS Publication 590:
- Use the Uniform Lifetime Table if your spouse isn't more than 10 years younger than you, your spouse isn't the sole beneficiary or you're single.
- Use the Joint and Last Survivor Table when your spouse is the sole beneficiary and he/she is more than 10 years younger than you.
- The Single Life Expectancy Table is for beneficiaries of accounts whose owner has died.
Although you must calculate the RMD separately for each IRA you own, you may withdraw the combined amount from one or more of them. The same goes for owners of one or more 403(b) accounts. However, RMDs required from 401(k) or 457(b) plans must be taken separately from each account.
To learn more about RMDs, read IRS Publication 590 at www.irs.gov.
1For IRA owners who turn 70½ on or after 1/1/2020.