RMD is a Required Minimum Distribution. The IRS requires that you start taking withdrawals from your qualified retirement accounts once you hit age 70 and one-half. The withdrawal is based on your prior year’s December 31st account balance and an IRS table based on your age. Required Minimum Distribution rules exist to prevent you from avoiding income tax. When the pension money was put in, it was not taxed.
RMD withdrawal calculations are based on actuarial tables that take into account your age and your IRA balances. The IRS also factors in your spouse’s age, if you’re at least ten years older. At age 70 and one-half, the IRS assumes a life expectancy of another 27.4 years. Your RMD is calculated by dividing your account balance into roughly equal annual withdrawals designed to last for that period. RMD calculations are reset every year based on a gradually reduced life expectancy timeline.
You must make your first withdrawal no later than April 1 of the year following the year in which you reached the age of 70 and one-half. April 1 falls just 14 days before the tax filing deadline for the previous year. The IRS allows IRA contributions for the prior year right up until April 15 of the current year. For all years after you turn 70 and a half, you must make your withdrawals between January 1 and December 31 of the current calendar year.
Your RMDs are subject to ordinary income tax, but if you fail to take an RMD, you have to pay a 50% tax penalty. The penalty is based on the dollar amount of the RMD. For example, if you were supposed to make a $5000 withdrawal, you have to pay a $2500 tax penalty. You can’t avoid or delay RMDs even if you funded a traditional IRA with after-tax earnings. However, RMDs do not apply to Roth IRAs. Unlike traditional IRAs, Roths are entirely funded with income that’s already been taxed.