• Starting at the age of 70½, individuals must take MRDs from their retirement accounts.

When participants reach age 70½, they must begin taking withdrawals from their retirement plans. This is referred to as a Minimum Required Distribution (MRD) or Required Minimum Distribution (RMD).

At this age, an MRD is necessary, and the participant must take these withdrawals from any retirement accounts that previously allowed tax-free deferrals or tax-deferred earnings. These typically include 401(k) plans, 403(b) plans, Rollover individual retirement accounts (IRAs), Savings Incentive Match Plans for Employees (SIMPLE) IRAs, Simplified Employee Pension Plan (SEP)-IRAs, Keogh plans, as well as traditional IRAs. The MRD is taxed as ordinary income at the federal income tax rate in the year in which the money is withdrawn.

Required date

The “required beginning date” for an MRD is April 1 following the year in which the individual attains age 70½. In subsequent years, the deadline is December 31.

Required amount

Amounts are based on life expectancy according to the appropriate Internal Revenue Service (IRS) life expectancy tables. A minimum amount is required, although more can always be taken if desired. If an account owner has multiple IRA accounts, the MRD must be calculated separately on each IRA each year. However, the IRA accounts may be aggregated so that the MRD may be withdrawn entirely from one account or as portions from each. Any qualified plan accounts or inherited IRAs must be calculated separately as well.

Penalty

The MRD may be withdrawn periodically throughout the year or in one lump sum distribution. If the participant fails to take an MRD at the appropriate time, one of the most severe IRS penalties will be imposed — 50 percent of the amount that should have been distributed will be forfeited.

Exceptions

There are always exceptions to every rule. For example, a Roth IRA is not subject to the MRD rules.

In addition, a person that continues to work after reaching age 70½ may not be bound by this rule in any current employer-sponsored retirement plan if the plan allows for it. Often a plan document will state that an active employee is not required to begin distributions until after termination of employment. If an account owner continues to work after age 70½ and meets the eligibility requirements, that owner can contribute to a Roth IRA. But generally, account owners cannot contribute to any other kind of IRA after reaching age 70½.