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If you’re currently contributing to an IRA, 401(k) or another retirement plan, you’re on the right track. The benefits, which include being able to invest funds and watch them grow into a sizeable nest egg without immediate income tax liability, are definitely worth the sacrifice of saving a chunk of your paycheck each month. But remember you can’t delay paying those income taxes forever. When you reach age 70 ½, you must take required minimum distributions (RMDs).

Since there has been some confusion over the details behind this rule, I thought it would be helpful to outline some of the specifics:

1. You are required to pay income taxes on the rate in the year of your withdrawal, regardless of whether your investments have increased or decreased in value.

2. Your RMDs are configured via your lifetime expectancy based on your age, and the value of your investments at the close of business on Dec. 31. The life expectancy factor in the table decreases each year, and the percentage you must withdraw increases. See the IRS’ Lifetime Table specified in Publication 590-B for details.

For example, if you had $100,000 in your IRA as of Dec. 31, 2015 and you turned 70 1/2 this year, then you would divide $100,000 by 27.4 (the life expectancy specified by the table), which results in a $3,650 required withdrawal. If you postpone the withdrawal to April 1, 2017, then you will have to make another withdrawal by December 31, 2017, based on the total value of your retirement accounts (excluding Roth accounts) as of Dec. 31, 2016.

3. You must take your first RMD withdrawal by April 1 of the year after you reach age 70 ½ unless you’re still working and only have an employer-sponsored plan (then you must start taking them the year after you retire). If you do put off that withdrawal until the following year, you are required to make two withdrawals in the same year.

4. At your request, a financial professional can make the computations on your behalf at the beginning of each year and inform you of the RMDs for that year. You can also request a monthly withdrawal plan to ensure you meet the RMD for that year.

5. If you do not take a proper RMD within the IRS required time period, you will have to pay a staggering 50 percent penalty of the deficiency, plus applicable income taxes. That could put a serious dent in your hard-earned retirement funds, so make sure you don’t skip one!

6. You are required to take RMDs for each of your separate investment accounts.

7. You can make a tax-deductible charitable donation to a qualified charity up to $100,000 as part of your RMD. Just make sure to inform your fund’s trustee the contribution is direct so it’s qualified as deductible.

8. After you reach 70 1/2, you will no longer be able to make IRA contributions to your regular IRA. However, you can make contributions to Roth plans, which are not subject to minimum required withdrawals. For more information about Roth IRAs, see this previous blog post.

The bottom line: It’s important to understand all the details behind RMDs, as I’m sure you don’t want to be hit with the penalties that may result from failing to take the right amounts at the right time. As always, you can consult with a financial expert if you have any questions regarding the specifics of withdrawals from your investment funds.

Ron L. Brown, CFP®

Author Ron L. Brown, CFP®

Ron is a CERTIFIED FINANCIAL PLANNER™ and president of R.L. Brown Wealth Management. He specializes in retirement, estate, and business planning for professionals and entrepreneurs. Ron assists his clients with creating a financial plan to ensure they are able to live their ideal lifestyle during retirement and leave a strong legacy for their family. Ron has been featured in The Wall Street Journal, US News, Yahoo Finance, Investopedia, and numerous other high profile financial publications.

More posts by Ron L. Brown, CFP®

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