IRA Required Minimum Distributions
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Required Minimum Distributions, often referred to as RMDs, are amounts that the federal government requires you to withdraw annually from traditional IRAs and employer-sponsored retirement plans after you reach age 70½ (or, in some cases, after you retire). You can always withdraw more than the minimum amount from your IRA or plan in any year, but if you withdraw less than the required minimum, you will be subject to a federal penalty. The IRS penalty is an excise tax equal to 50% of the amount you should have withdrawn.
According to Forefield, Inc., the RMD rules are calculated to spread out the distribution of your entire interest in an IRA or plan account over your life expectancy or the joint life expectancy of you and your beneficiary. The purpose of the RMD rules is to ensure that people don't just accumulate retirement accounts, defer taxation, and leave these retirement funds as an inheritance. Instead, required minimum distributions generally have the effect of producing taxable income during your lifetime.
Unlike most distributions from IRAs and qualified plans, RMDs are not eligible for rollover; they must be taken in cash in order to generate taxable income. However, because the distributions are not rollover-eligible, taxes are not required to be withheld at the time of distribution, and may thus be postponed until the individual files an income-tax return for the year. Any amount withdrawn above and beyond the minimum required amount will be eligible for rollover, and tax must be withheld from that portion if the rollover option is not elected.
Employer-sponsored qualified retirement plans, such as 401(k) plans, require the same distributions that IRAs do. However, the requirements are somewhat different from those for IRAs. While IRAs require RMDs for any individual above 70½ years of age, an employer-sponsored plan has the additional requirement that the individual either:
a. Own more than 5% of the company
-or-
b. Have terminated employment.
A person who does not meet one of these requirements is not subject to the RMD rules.
In addition, employer-sponsored plans differ from IRAs in rules relating to aggregation. A person with multiple IRAs may add the balances in each account to determine the total RMD for the year, then take that full amount from a single IRA, or split it in any manner between two or more IRAs. However, employer-sponsored plans must remain distinct; the RMD calculation for each is performed separately, and the distributions must be taken from each plan individually.
This site can calculate simple RMD's given appropriate information: http://www.acctsite.com/calcs/RetireDistrib.html
