Tax-deferred plans can be a great way to save money for retirement, but you can’t defer your tax liability forever. Once you reach age 70½, you must begin taking required minimum distributions (RMDs) from these plans each year or face a 50% penalty on the amount that should have been withdrawn. If you are still employed, you may be able to delay minimum distributions from your current employer’s plan until after you retire, but you still must take RMDs from other tax-deferred accounts (except Roth IRAs). The RMD is the smallest amount you must withdraw each year, but you can always take more than the minimum amount.
Even though you must take an RMD for the tax year in which you turn 70½, you have a one-time opportunity to wait until April 1 (not April 15) of the following year to take your first distribution. For example:
- If your 70th birthday is in November 2015, you will turn 70½ in May 2016 and must take an RMD for 2016 no later than April 1, 2017.
- You must take your 2017 distribution by December 31, 2017, your 2018 distribution by December 31, 2018, and so on.
Annual RMDs are based on the account balances of all your traditional IRAs and employer plans as of December 31 of the previous year, your age in the current tax year, and your life expectancy as defined in IRS tables.
Most people use the IRS Uniform Lifetime Table (Table III). If your spouse is more than 10 years younger than you and the sole beneficiary of your IRA, you must use the Joint Life and Last Survivor Expectancy Table (Table II). Table I is for account beneficiaries, who have different RMD requirements than original account owners. To calculate your RMD, simply divide the value of each retirement account balance (as of December 31 of the previous year) by the distribution period in the IRS table.
If you have multiple tax-deferred accounts, calculating RMDs can be complex. That’s one reason why people consolidate their retirement accounts as they approach retirement or retire. The administrator of your retirement plan may provide information regarding your RMD for a specific account, but you might also consult with your tax professional.