The IRS code will not allow you to save money indefinitely in your retirement accounts. Therefore, the agency has a required minimum distribution (RMD) after you reach as certain age. The RMD refers to the amount the IRS codes requires you to withdraw each year from retirement accounts, which include including traditional IRAs, simplified employee pension (SEP), IRAs SIMPLE IRAs, and a multitude of other employer-sponsored retirement plans.
Use the following checklist to ensure you understand the basic rules for required minimum distribution and maximize the spending power of your retirement accounts.
Withdrawal after age 70½
The RMD ensures that you withdraw at least a portion of the money in the account over your remaining lifetime—usually starting the year after you reach age 70½. For example, if you calculate the RMD on your traditional IRA as $10,000 in 2013 and you withdraw only $7,500 during the calendar year, you must pay an excise tax of $1,250 or 50% of the amount ($2,500) that exceeds the actual distribution you must take.
Individuals who continue to work after age 70½ can delay distribution from employers’ plans until April 1 of the year after retirement. Rules prohibit delaying distributions from traditional IRAs.
Younger spouse rule
If you have your spouse as the sole beneficiary, and the person is more than 10 years younger than you, calculate your RMD based on the combine life expectancy of yourself and your spouse. Use the figure in the IRS’s Joint Life and Last Survivor Expectancy Table, which provides for a longer payout period.
You must also pay federal and state income taxes on the funds you withdraw. If you fail to withdraw the minimum amount in any one year, expect to pay a substantial penalty of 50% on the amount you fail to withdraw. You must also pay federal or state income taxes.