Throughout your career, you have been working hard to save in one or more retirement accounts. Once you retire, you’ll have new decisions to make.
But one choice has already been made for you: the age at which you must start taking withdrawals, or distributions.
Once you reach age 70½, you must begin taking taxable withdrawals — known as required minimum distributions, or RMDs — from your traditional IRA and most other retirement plans, such as a 401(k), 403(b) or 457(b). A Roth IRA is not subject to RMDs.
If you turned 70½ in 2013, you may want to take your first RMD no later than Dec. 31. You could wait until April 1, 2014 to take your initial distribution, but you’d then have to take your next one by Dec. 31, 2014 — and two distributions in one year could have a sizable impact on your taxes. After you’ve taken your first RMD, you’ll have to take one by Dec. 31 of each calendar year for the rest of your life — or until your account balance is zero.
These minimum distributions are calculated annually based on your age, account balance at the previous year's end, marital status and spouse's age. If you don't meet the annual minimum distribution, you may be subject to a 50 percent penalty on your underpayment, plus ordinary income tax as funds are withdrawn.
Of course, while you have to take at least the minimum distribution from your retirement plans, you can always take more.
But should you?
There’s no right answer. Obviously, if you need the money, you may have to go beyond the minimum when taking distributions. But if you have enough income from other sources — such as investments in other accounts, Social Security and earnings from a part-time job — you may want to stick with the minimum distributions and leave your retirement accounts as intact as possible for as long as possible, allowing them to potentially continue growing tax-deferred.
Whatever your decision, allow sufficient time to determine the size and timing of your RMDs, because if you have several retirement accounts, you may need to make some choices.
For example, if you have more than one IRA, you can add the RMDS and take the combined distribution amount from any one — or more — of your IRAs. And if you have more than one 401(k), you must calculate your RMDs separately for each plan.
Consult with your tax and financial advisers before you start taking your RMDs.
Joe Faulk is a financial adviser.