Required Minimum Distribution for Retirement Plans
Retirement plans are a place to set money aside for retirement on a tax-advantaged basis, but government regulations can dictate when you have to withdraw your funds. Employer-sponsored retirement plans and traditional individual retirement accounts are subject to "required minimum distributions." These RMDs force you to begin taking money out of your retirement account by a certain point to avoid a substantial tax penalty.
Required minimum distributions are withdrawals you must start making from a retirement account starting in the year you reach age 70 1/2. If you don't withdraw the full amount of your RMD for that year, the amount you fail to withdraw is taxed at a rate of 50 percent. You can choose to withdraw more than the minimum required amount, but you must at least take the minimum or pay the tax penalty.
You have to take required minimum distributions by Dec. 31 of the year for which the RMD is due. For example, if your RMD for 2012 is $5,000, you must withdraw $5,000 from your account by Dec. 31, 2012. An exception is made for your first RMD; you don't have to take the RMD for the year you reach age 70 1/2 until April 1 of the following year.
The RMD you have to take each year depends on your retirement account balance and your age at the end of the year. According to the Internal Revenue Service, an RMD equals your account balance on Dec. 31 of the previous year, divided by a number called the "distribution period," which changes based on your age. The distribution period is 27.4 at age 70. This number decreases over time, which means you have to withdraw a larger percentage of your total account balance each year.
RMD rules vary from one type of retirement plan to another. RMDs do not apply to Roth IRAs. With all employer-offered plans that are not IRAs -- such as 401(k) plans, profit-sharing plans and 403(b) plans -- you don't have to make required minimum withdrawals if you work past age 70 1/2. With SIMPLE and SEP IRAs, you and your employer can still contribute to your plan after age 70 1/2, but you have to make RMDs each year. You can't contribute to a traditional IRA after age 70 1/2 or delay RMDs by working past age 70 1/2.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.