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When to Make Withdrawals From Retirement Accounts

You can avoid penalties by taking out the required minimum amounts.

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.

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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 can help you figure out what you'll have to pay each year.

Just enter your age for the year in which you need to make a withdrawal and the balance in your account as of the end of the previous year. The calculator also has an input for your expected rate of return, which allows it to calculate your expected required minimum distributions for future years.

Say for instance the balance in your IRA was $200,000 as of Dec. 31, 2007, and you turn 70 before June 30, 2008. Your RMD for 2008 would be $7,299.27, so you would need to withdraw an amount from your IRA equal to or greater than that amount by April 1, 2009. Your second RMD of $7,876 (assuming your investments earn 8%) would be due by Dec. 31, 2009.

The April deadline for the first withdrawal is the "beginning date" of the RMDs. In subsequent years, the withdrawals for a given year must be made by Dec. 31 of the same year.

Your RMD will typically be lower if you are married and your spouse is more than a decade younger than you are. In that case, the IRS uses a different life expectancy table in its calculations -- one that takes into account the fact that your spouse will likely outlive you.

Bear in mind that if you hold multiple retirement accounts, you must calculate RMDs for each one. You can add up the separate amounts and withdraw the total from only one of your accounts.

Peter McDougall is a free-lance writer in Freeport, Me.