When should I take RMDs and how do they work?

Retirement accounts enable us to save money tax-deferred until we take distributions in retirement. While the government allows us to defer taxes until retirement they eventually want their money and require us to take RMDs, or Required Minimum Distributions. RMDs apply to most retirement accounts except the Roth IRA since money in that account was already taxed before it was put in. The accounts subject to RMDs are;

• traditional IRAs

• SEP IRAs

• SIMPLE IRAs

• 401(k) plans

• 403(b) plans

• 457(b) plans

• profit sharing plans

• other defined contribution plans

The first RMD must be taken by April 1st of the year following the year you turn 70.5 for anyone born prior to July 1, 1949. If you were born after this date you must take your first RMD by April 1st of the year following the year you turn 72. Subsequent distributions need to be taken by Dec 31st of any given year.

The IRS website has resources that help you calculate your RMD. It’s essentially based on your account balance and your life expectancy. All retirement accounts listed above are subject to RMDs, so if you have multiple accounts you must calculate the RMD on each to find your total RMD for the year. However, you can take the total RMD out of one account for simplicity.

There are consequences for not taking RMDs including a 50% tax on amounts not distributed, so take this process very seriously. I recommend working with a CPA at least for the first year to ensure you avoid any penalties.