Understanding Required Minimum Distributions

By JJ Montanaro

WHETHER OR NOT you’re ready to draw retirement, IRS rules require anyone who owns a traditional IRA or has a retirement plan, such as a 401(k), to start pulling out their money at age 70½.

It pays to know the ins and outs of those withdrawals — called required minimum distributions, or RMDs. That’s because there’s a 50% penalty for not taking out your RMD, or taking out too little. The math is pretty easy. Forget to make a $10,000 RMD and you pay a $5,000 penalty. Ouch.

To help avoid a costly mistake, these five concepts are worth keeping straight:

The beginning date can be delayed. You can take your first RMD the year you turn 70½ or as late as April 1 of the following year. Remember, though, if you delay into the next calendar year, you’ll be forced to make two RMDs that year. 

Employer retirement plans have their own start rule. While IRA RMDs always start at 70½, you can delay RMDs in employer retirement plans until you quit working — as long as the plan is from the place where you’re still employed. The RMDs from those plans must begin no later than April 1 following the calendar year you retire.

RMDs can’t be rolled over to a Roth IRA. Anyone at any age can convert money into a Roth IRA (and pay taxes on it), but that amount would need to be above and beyond what they took out to meet the RMD requirement.

The implications go beyond income taxes. In your distribution planning, it’s important to remember RMDs mean increased income, and that can boost Medicare premiums, result in taxation of Social Security benefits and even reduce or eliminate eligibility for needs-based programs. Take the long view of all implications of that increased income.

Be careful where you pull from. You’re not required to take RMDs from all your IRAs individually. You may calculate the RMDs individually and pull the total amount from any or all of the IRAs. However, money withdrawn from an IRA does not satisfy the RMD requirement for a 401(k) or other employer retirement plan. RMDs for those types of accounts must be calculated and withdrawn separately.

Answer a few questions and we’ll estimate how much you need to take from your IRAs.


Views and opinions expressed by members are for informational purposes only and should not be deemed as an endorsement by USAA. 

Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.

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