Taxpayers would like to have total control over their retirement funds, but unfortunately that is not the case. Uncle Sam wants some of that money sooner than later and has rules that govern how and when retirement funds should be distributed.
Owners of traditional individual retirement accounts (IRA’s), SIMPLE IRA’s and SEP IRA’s as well as qualified plan participants must begin withdrawing from those accounts by April 1 of the year after they reach the age of 70 ½. The amount to withdraw is determined by dividing the fair market value at year end by the distribution period or life expectancy. The IRS has special tables that are used to calculate the required amount. The account owner must withdraw the minimum amount but can take more than that if it is desired. The withdrawals will be taxable income to the recipient except for any amounts that were previously taxed (basis) or can be received tax-free (i.e.: distributions from Roth accounts).
It should be noted that some qualified plans allow for a deferral of these distributions until the employee retires, and that Roth IRA’s are exempt from these requirements.
It is important that RMD’s are taken when necessary. Failure to do that will result in a fifty percent penalty on the amount that was required to be withdrawn.