When you save money in a tax-deferred retirement savings plan, eventually you are forced by law to start making annual withdrawals*. Here’s how it works:
- With most tax-deferred retirement plans, such as traditional IRAs, 401(k)s, 403(b)s and the Thrift Savings Plan (TSP), you must start taking required minimum distributions no later than age 70½.
- You can start making withdrawals sooner (between ages 59 ½ and 70 ½) and still avoid any early withdrawal penalty.
- You can take more than the required minimum amount. But the government does mandate a certain amount must begin coming out of these plans at least once a year, starting at age 70½.
- In most cases, your retirement plan custodian — a bank, mutual fund company or brokerage firm, for example — will calculate the required minimum distribution amount for you. Remember, however, that plan custodians only will calculate RMD withdrawals for the money that they manage. Retirees with multiple tax-deferred retirement accounts likely will receive several RMD calculations from multiple custodians.
- Make sure you withdraw at least the minimum amount. If you don’t, there is a 50 percent penalty on the amount that isn’t withdrawn. Example: A $1,000 penalty if $2,000 was supposed to have been withdrawn and wasn't.
- You can find out more details on how the required distribution amount is calculated here.
*Roth IRAs do not require annual withdrawals at a specific age. In fact, the account owner never is required to take money out of a Roth IRA. You can make withdrawals if you like, but the government won't require you to do so. Amounts that are withdrawn from Roth IRAs and follow income tax regulations will not be taxed.