Tax-deferred retirement saving is one of the best tools at investors' disposal, but you can't simply let your money grow forever -- at some point, you have to start withdrawing it. This is known as required minimum distributions (RMDs), which is an IRS rule that says you need to start taking distributions from certain retirement accounts beginning at age 70 1/2.
Here's a guide to what an RMD is, when your RMD deadline is, and how to calculate your 2018 RMD. Be sure that you get this right. The penalty for non-compliance is severe.
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What is an RMD?
RMD stands for required minimum distribution, and is an annual minimum amount that must be withdrawn from certain types of retirement accounts after you reach 70 1/2 years of age.
Generally speaking, you have to take each year's RMD by the end of the calendar year. The only exception is for your first RMD, which must be taken by April 1 following the calendar year during which you turn 70 1/2. For example, if you turn 70 1/2 during 2018, you technically have until April 1, 2019, to take your first RMD. (I say "technically" because there's a good reason not to wait until the last minute, which we'll get into later on.)
You can choose to take your RMD however you want. You can take a series of payments throughout the year, or you can take your RMD in a lump sum. And if you have more than one account subject to RMD rules, you can choose to withdraw your total RMD from just one account, or from a combination of them, as long as the overall minimum amount is withdrawn during the year.
What accounts have RMD requirements?
All retirement accounts where contributions are made on a pre-tax basis are subject to RMD requirements. This includes, but is not necessarily limited to:
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Traditional IRAs
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401(k)s, 403(b)s, and 457s (although if you're still working for the sponsoring employer, you may be exempt from the RMD requirement)
What's exempt from RMDs? After-tax retirement accounts -- specifically Roth IRAs and any portions of 401(k) or similar accounts that came from Roth contributions don't have RMD requirements. The primary reason RMD rules exist is to ensure that you eventually pay your taxes on the funds in your account. Qualified Roth withdrawals are tax-free, so the IRS doesn't really care how long you leave your money in the account.
How to calculate your 2018 RMD
To calculate your 2018 RMD, you'll need the following information:
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Your account balance(s) as of Dec. 31, 2017.
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The age you'll reach in 2018.
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The appropriate life expectancy table from the IRS. For most people, this is the Uniform Lifetime Table. If your spouse is the sole beneficiary of your account and he or she is over 10 years younger than you, you'll use the Joint Life and Last Survivor Expectancy Table, which you can find in IRS Publication 590-B.