When you save money in a retirement plan, you are eventually forced by law to start making annual withdrawals*. Here’s how it works:
- With most retirement plans, such as traditional IRAs, 401(k)s, 403(b)s, and pension plans, you must start taking required minimum distributions no later than age 70½.
- You can start making withdrawals sooner, such as past age 59½, 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. You don’t need to worry much about making the proper calculation.
- Make sure you withdraw at least the minimum amount. If you don’t, there is a 50% penalty on the amount that isn’t withdrawn.
- You can find out more details on how the required distribution amount is calculated at http://www.irs.gov/retirement/article/0,,id=96989,00.html.
*Roth IRAs do not require annual withdrawals at a specific age—in fact, the account owner is never 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.
Update for 2009 only: The Worker, Retiree, and Employer Recovery Act of 2008 waives required minimum distributions from IRAs and many employer-sponsored retirement plans, such as 401(k)s and 403(b)s, for the calendar year 2009 only. As legislation stands now, retirees subject to required minimum distribution rules must take their required distributions in 2010.