The end of the year is a busy time, but among the long list of things to do should be taking a required minimum distribution – for those who haven’t already done so, are at least 72 years old and have a retirement account.
Retirement Tip of the Week: If you haven’t yet taken your required minimum distribution, now is the time to get that sorted to avoid a heavy penalty and a headache.
Minimum distributions or RMDs must be taken by account holders at 72. These mandatory withdrawals must be made by December 31st each year. First-time takers have until the following April 1 of the year in which they turn 72 to take their first RMD, but if they do that may have two distributions to take that year – their first RMD as well as the one required each year by end of year.
See: I have questions regarding my RMDs
For failing to take an RMD, the penalty is 50% of what was required. If an investor’s RMD was $5,000 for the year, and he took no distribution from his account, the penalty would be $2,500 (half of the amount he was supposed to distribute). If that same investor had taken $3,000 out of the account during the year – but was supposed to take at least $5,000 per the RMD calculation – he would be short $2,000 per the rule, and thus, face a $1,000 penalty (because that’s 50% of what he was left of his RMD).
Read: If you’re over 72 with an IRA, make sure you do this before the year ends
The government weighs a few factors when calculating someone’s required minimum distribution, including their age, the account balance as of Dec. 31 of the prior year and a life expectancy table. Individuals unsure of what they’re required to withdraw should reach out to the firm housing the account, or a financial planner if he or she is a client.
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However, there are some exceptions. For starters, Roth IRAs don’t have an RMD rule (but Roth 401(k) plans do). Beneficiaries of inherited accounts must follow their own rules depending on whether the original accountholder took distributions from these plans before they died.
Read: What’s the best way to take RMDs from your retirement accounts? The top three strategies are rated by experts.
Another exception: workers who are still at the company providing the retirement account are not required to take an RMD from that account – but they do have to take an RMD from any other retirement accounts with an RMD rule. For example, if a 75-year-old employee has a 401(k) at her current employer, and has two 401(k) plans from previous jobs and a traditional IRA, she’s still required to take an RMD from the latter three accounts.