When to Make Withdrawals From Retirement Accounts

The government is happy to let you save money tax-free in a retirement account -- but you have to start withdrawing money from the account when you turn 70½.

The Required Minimum Distribution (RMD), as the Internal Revenue Service calls it, is the minimum amount you are required to withdraw each year from your retirement account. The first withdrawal is required in the calendar year that you turn 70½ -- the year you turn 70 if your birthday is before June 30 -- and you must make additional minimum withdrawals in every subsequent year.

Even if you retired at 65 and were taking a little bit out each year, there is a mandatory minimum once you turn 70½.

You don't have to take RMDs from a Roth IRA -- which is good news if you can afford to leave the money in the account, where it will compound tax-free indefinitely.

And there is no need to make RMDs from a 401(k) if you're still working -- though otherwise such accounts do require minimum withdrawals.

What if you don't need the money and take less than the minimum, or don't make any withdrawals at all? The penalty for not meeting your RMD amount is 50% of the difference between what you did take out and what you were supposed to take out.

So if your RMD is $20,000 and you choose only to withdraw $10,000 from your account, you'll have to pay a $5,000 penalty.

Ouch!

Calculating the RMD is based on a combination of your age (life expectancy) and the amount that you have in your account. It is difficult to calculate on your own, but costly if you make an error. The online RMD calculator from BankingMyWay.com can help you figure out what you'll have to pay each year.