Required Minimum Distributions (RMDs): Who Qualifies and What You Get
Learn about the mandatory withdrawals required from certain retirement accounts and the penalties for missing your annual distribution.
Required Minimum Distributions (RMDs) are the mandatory annual withdrawals you must take from certain retirement accounts once you reach a specific age.
Who it's for
This rule applies to individuals who hold traditional IRAs or 401(k)s. If you have funds held in these specific types of retirement accounts, you are required to begin withdrawing a certain amount of money each year once you reach the age threshold set by the government.
What you get
The primary outcome of this requirement is a mandatory annual withdrawal of funds from your retirement account. These funds are released from your tax-advantaged account and provided to you as liquid cash. This process ensures that the government eventually collects taxes on the money that has been growing tax-deferred within your retirement accounts over time.
What it costs you
While you receive the funds, there are significant financial implications to consider. Every dollar you withdraw through an RMD is taxed as ordinary income, meaning it is added to your total income for the year and taxed at your current rate. Additionally, if you fail to withdraw the required amount by the deadline, you will be subject to heavy penalties. These penalties are designed to discourage people from leaving money in these accounts indefinitely.
The catch to know
The most important thing to keep in mind is that the age for starting RMDs is not a fixed constant; it has been shifting due to recent legislation known as the SECURE Act. Because these ages change based on when you were born and new laws, you must verify your specific starting age to ensure you do not miss your window.
How to apply
- Check your current age against the latest legislative guidelines to see if you have reached the required starting age.
- Review your account statements for your traditional IRA or 401(k) to determine your current balance.
- Contact your financial institution or plan administrator to initiate the withdrawal process and schedule your distribution.
- Coordinate with a tax professional to manage the tax implications of your distribution and avoid unexpected penalties.