Retirement Planning Tip: Required Minimum Distributions

Required Minimum DistributionsIf you’re putting money into a retirement savings account, you should know that once you turn 70½ years old, you may need to start using those retirement savings. That’s not some oddly specific financial advice; it’s the law. The same federal tax laws that provide for investments like 401(k) plans and individual retirement arrangements, or IRA accounts, also require you to withdraw at least some of your retirement funds as taxable distributions during your lifetime.

Why Take Required Minimum Distributions?

These required minimum distribution rules are intended to ensure that you don’t simply defer taxation and leave these retirement funds as an inheritance. So, once you turn 70½, you need to begin withdrawing a certain amount from your investments each year.

That amount is calculated annually. It’s based on the account’s balance at the end of the previous calendar year as well as a set of actuarial tables that factor in both your age and your beneficiary’s age. Check out AARP’s Required Minimum Distribution Calculator for an easy way to determine your required distributions.

If you don’t take a distribution, or if the amount you withdraw doesn’t meet the requirement, you may have to pay a 50 percent excise tax on the amount not distributed. Required minimum distributions are never eligible for rollover into other retirement accounts; you must take out the money and pay the taxes.

What Accounts Require Minimum Distributions?

Most retirement accounts you’re familiar with require these annual withdrawals:

  • IRAs (traditional, SEP and SIMPLE)
  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • Profit sharing plans
  • Money purchases.

Since contributions to Roth IRAs are not tax-exempt, the IRS does not require distributions from Roth IRAs at any age. For beneficiaries who inherit a Roth IRA, certain minimum distribution rules do apply.

As with most things investment-related, a lot depends on your particular circumstances. If you have questions, contact your financial advisor or your plan administrator.

3 thoughts on “Retirement Planning Tip: Required Minimum Distributions

  1. Elsie McCabe

    I am currently still working; does this mandatory withdrawal pertain to people over 70 who are still employed?

    1. NYSLRS

      That depends on your plan. According to the IRS, a plan can let you retire before you take your first RMD. For example, many NYSLRS members also participate in the New York State Deferred Compensation Plan, which lets you wait until you retire. However, other plans do hold to the 70½ requirement. You’ll need to contact your plan administrator to find out how your particular plan is structured.

  2. Steven Gilbert

    Important to note: If you put $’s into the Roth version of 457b offered by NYSDCP, and retire before 70 1/2, you can rollover the contents of your 457b Roth into a personal Roth IRA, thus avoiding the need to take annual RMD’s


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