Key Points
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Required minimum distributions (RMDs) apply to non-Roth retirement accounts.
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You must take your RMD every year by Dec. 31 or otherwise risk a penalty.
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Putting those withdrawals on autopilot could prevent a costly mistake.
Using a traditional IRA or 401(k) to save for retirement can make a lot of sense when you’re in a higher tax bracket or need the up-front tax break on contributions these accounts offer. But there’s a reckoning to be dealt with once retirement rolls around.
Funds in a non-Roth retirement account are subject to required minimum distributions, or RMDs. And if you were born before 1960, RMDs start at age 73.
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It’s important to know your RMD deadlines so you don’t miss them — and get hit with a costly penalty as a result.
Make sure you take your money out on time
Keeping track of RMD deadlines is pretty simple: RMDs are due on Dec. 31 every year.
You’re allowed to defer your first RMD to April 1 of the following year. Other than that, all RMDs have to be withdrawn by Dec. 31. If you’re late, you risk a 25% penalty. So a missed $10,000 RMD, for example, will typically cost you $2,500 off the bat.
There’s an easy strategy that could help you avoid those harsh penalties, though: automatic distributions.
Most institutions let you set up RMDs in advance so you don’t have to worry about forgetting them. You can generally set up your account so your money comes out monthly, quarterly, or annually — whatever schedule works best for you.
If you’d rather handle your RMDs manually, set a calendar reminder well ahead of the Dec. 31 deadline. December can be a busy time, and you don’t want your RMDs to get lost in the holiday rush.
Also, don’t assume that a same-day transaction is safe. If you log in to your account on Dec. 31 to take your withdrawal, the funds may not clear in time to meet the deadline.
It’s OK to wait until the end of the year. But give yourself a few days of leeway, just in case.
There’s a way to avoid RMDs
Of course, if you don’t want to deal with the hassle of RMDs, one potential solution is to make a Roth conversion before retirement. This allows you to roll traditional retirement account funds into a Roth IRA.
Roth conversions are a taxable event, so if you decide to go this route, plan carefully. Moving a $500,000 traditional IRA into a Roth in the same tax year, for example, could leave you paying the IRS a boatload of money. But a conversion could be another way to make sure RMDs don’t become a thorn in your side while you’re trying to enjoy your retirement.
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