What Is a Required Minimum Distribution?

Written by , August 24, 2011

What Is a Required Minimum DistributionOne of the most important features of an IRA or 401(k) is its tax benefits. With an IRA, investment gains are not taxed until they are withdrawn. The same is true for a 401(k), and contributions also come from pre-tax dollars.

Once you retire, it’s smart to keep as much of your money in your retirement account as possible while still having enough to live on. But even if you’re working part-time and have sufficient income from other sources, you won’t be able to avoid taxes forever. The IRS eventually wants you to withdraw some funds and pay taxes on the taxable amounts, so they require retirees to take a minimum distribution each year.

Here’s some retirement advice and information you need to know about required minimum distributions.

  • Age for minimum distributions. IRA owners must take the required minimum distribution starting at the age of 70½. Those with other types of retirement plans must take the distribution starting at 70½ or in the year in which they retire, whichever is later. If the plan owner dies before he or she is required to take minimum distributions, the beneficiary must withdraw the entire amount within 5 years or start taking minimum distributions within a year.
  • Rule for Roth IRAs. There is no required minimum distribution during the owner’s lifetime with a Roth IRA. But distributions must be taken by the beneficiary after the policy owner’s death.
  • Timing of minimum distributions. Those who are required to take minimum distributions due to their age have until April 1st of the year following the year in which they turn 70½ to do so. For subsequent years, they must take the distribution no later than December 31st of that year. That means the account owner may end up having to take two distributions in the first year.
  • Amount of minimum distributions. Your required minimum distribution will vary according to the amount in your account and your life expectancy. The account balance is divided by a life expectancy factor determined by the IRS. The amount must be calculated separately for each account, but IRA and 403(b) owners with more than one such account may add up these amounts and take them from one account if so desired. Those with other types of retirement plans must take the minimum distribution from each individual account.
  • Tax penalties. Failure to take your minimum distribution by the deadline, the IRS will tax the amount not taken at 50%. And you’ll still be required to take a distribution in the same amount. However, if inadequate withdrawals were made due to a reasonable error, you may file to have the penalty waived.
  • No carryover. You are allowed to take more than the minimum required distribution each year. However, any excess cannot be applied to the minimum for a subsequent year.
  • It’s in your best interest to know your required minimum distribution and make certain that you take it before the deadline each year. Many plan administrators will advise you of the amount. Worksheets are also available from the IRS to help you make the calculations.

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