When individuals reach age 70 ½ , they must begin taking withdrawals from their retirement plan. This is referred to as a Minimum Required Distribution (MRD) or Required Minimum Distribution (RMD).
MRDs apply to most tax-deferred accounts. Once an individual with a retirement plan reaches the age 70 ½, 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 a 401(k) plan, 403(b) plan, Rollover IRA, SIMPLE IRA, SEP-IRA, Keogh, as well as an individual retirement account (IRA). The MRD is taxed as ordinary income at the federal income tax rate in the year in which the money is withdrawn.
Summary of requirements
Required date. The “required beginning date” for an MRD is April 1 following the year in which the individual attains age 70 ½. In subsequent years, the deadline is December 31st.
Required amount. Amounts are based on life expectancy according to the appropriate 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 However, all of the IRA accounts may be aggregated and the total withdrawn from one IRA or a portion from each one.
Any qualified plan accounts or inherited IRAs must be calculated separately as well.
Penalty. The MRD may be withdrawn periodically throughout the year or made in one lump sum distribution.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 70 ½ may not be bound by this rule in any current employer-sponsored retirement plan in which the individual participates 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 70 ½ and meets the eligibility requirements, the individual can contribute to a Roth IRA. But, generally, the individual cannot contribute to any other kind of IRA after reaching age 70 ½.