RMD Rules for Retirees

What are RMDs? Required minimum distributions are annual withdrawals that you must take from traditional IRAs, as well as from 401(k)s and other employer-based retirement plans -- including 403(b)s, 457s and the federal Thrift Savings Plan -- after you reach age 70½. The reason: Uncle Sam doesn’t want you hoarding your money in tax-deferred accounts forever. He wants his cut. Payouts are taxed at your ordinary income-tax rate unless you have made after-tax contributions, in which case a portion of your withdrawals is tax-free.

When do I restart my RMDs? Now. RMD rules were restored for 2010. If you suspended automatic monthly payouts, contact your IRA administrator to restart the service for 2010. Even if you’re thinking about converting a traditional account to a Roth IRA this year, you’ll still have to take the RMD. But it just might be the last one you’ll ever have to take.

Who must take them? RMD rules apply to owners of retirement accounts. If you’re still on the job at age 70½, you can generally skip the distribution from your employer plan until you retire, but you’ll still need to tap your IRA every year. There are no distribution requirements for owners of tax-free Roth IRAs. But owners of inherited traditional and Roth IRA accounts (other than spouses) who don’t clean out the IRA in the first five years after the original owner’s death must take annual distributions. Congress temporarily suspended required minimum distributions in 2009 so that retirees would not be forced to withdraw money from accounts decimated by the stock-market collapse.

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When is the deadline? You generally must take your distribution by December 31 each year, but you get an extension for your first withdrawal -- until April 1 of the year after you turn 70½. However, if you delay your first distribution, you will face an extra-big tax bill that year because you must take your next distribution by December 31 of the same year. You can always withdraw more than the required amount; but if you don’t take out the minimum, you’ll be hit with a 50% penalty on the amount that you failed to withdraw.

How much do I need to take? IRA withdrawals are based on the balance in all your traditional IRAs combined on December 31 of the previous year, divided by your life expectancy. Once you calculate the RMD based on that total, you can withdraw the money from any one or combination of those accounts. With 401(k)s and other company plans, you must calculate the RMD for each plan and withdraw the appropriate amount from each account. Find the life-expectancy divisor for your age in IRS Publication 590 (www.irs.gov), or use What Is My Required Minimum IRA Distribution? A special rule applies if your spouse is the beneficiary and is more than ten years younger than you.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.