The IRS generally requires that you withdraw the tax-deferred money that you’ve accumulated in your non-Roth retirement accounts each year once you turn age 70½. Required minimum distributions (RMDs), which are based on your life expectancy and account balances, are designed to help you gradually pay the taxes you owe on those assets. For more information on required minimum distributions, including at what point the distributions must start, read our Required Minimum Distributions FAQ.
In addition to the required minimum distribution, the IRS has a number of other regulations governing distributions from retirement accounts. This table highlights some of the key rules:
A tip about distributions: Many retirees leave the work force with savings in both after-tax and tax-deferred accounts. If you have enough income from after-tax accounts and other sources, you may want to save the distributions from your tax-deferred accounts for last.
You could pay a higher percentage of your retirement savings in taxes with a one-time payment than you would if you were taxed over time for smaller distributions.
You could also pay a 10% early withdrawal penalty to the IRS unless you qualify for an exception. In addition, your employer is required to withhold 20% of the distribution for federal income taxes.
Of course, a one-time lump-sum distribution may make sense if you have other assets to live on and want to spend your retirement money for a specific purpose.
Even though you’re retired, you may still be able to keep your money in your retirement plan if the balance is over $5,000, subject to the terms of your plan. Your investments (minus required distributions) will continue to have the opportunity to grow tax-deferred.
Consider this option if you’re happy with your plan’s provider and the choice of investments. Keep in mind that you’ll still be subject to the rules of your former employer’s plan and will need to begin taking minimum distributions (RMDs) after you turn 70½ or, if later, the year in which you retire.
However, if you are a 5% owner of the business sponsoring the retirement plan, you must begin taking your RMD when you turn 70½, whether or not you are retired.
If you roll your retirement plan savings into an IRA, you can continue to enjoy tax-advantaged growth potential.
You can roll Roth 401(k) and 403(b) accounts into a Roth IRA. Your non-Roth accounts can be rolled into traditional IRAs or Roth IRAs. You’ll owe the IRS any unpaid taxes on the taxable portion of a Roth IRA rollover; however, you won’t have to take required minimum distributions (RMDs) during your lifetime.
Rolling over to an IRA also allows you to:
If you come out of retirement and begin a second career, you can transfer your account balance directly from your former employer’s plan to your new employer’s plan if your new employer’s plan allows for it. Moving your money into your new employer’s plan allows you to retain the same potential for tax-deferred growth that you had in your former employer’s plan.
There are a few things to remember when moving your savings into a new employer’s plan:
The IRS generally requires that you regularly withdraw the tax-deferred money that you’ve accumulated in your non-Roth retirement accounts when you reach age 70½. RMDs, which are based on your life expectancy and account balances, are designed to help you gradually pay the taxes you owe on those assets.
When Do RMDs Start?
You are required to begin taking RMDs from your IRA account no later than April 1 of the year following the year you turn 70½. RMDs from your employer plan should begin no later than April 1 following the end of the calendar year in which you turn 70½ or retire, whichever is later. However, if you are a 5% owner of the business sponsoring the retirement plan, you must begin taking your RMD when you turn 70½, whether or not you are retired.
Can a Combined Amount Be Taken From One Account If I Have Multiple Retirement Accounts?
If you own more than one IRA, you can withdraw your RMD from each account, or you can combine your RMDs and withdraw the total from just one. The same is also true for 403(b) accounts. However, RMDs from 401(k), 457, money purchase and profit-sharing accounts must be taken separately.
How Can I Meet RMD Requirements and Still Continue to Save?
Of course, you can always withdraw more than the RMD, but you may want to consider leaving as much money as possible in your account(s) so your remaining savings have the opportunity to continue growing.
If you want to avoid taking RMDs, you can roll some or all of your non-Roth account(s) into a Roth IRA, which is not subject to RMDs during your lifetime.
You also have the option to reinvest RMDs taken from non-Roth account(s) into a non-retirement account. Moving money from a retirement account to a non-retirement account is a taxable transaction, so you’ll have to pay income tax withholding on your distribution.
Need More Information or Advice?
There’s much to consider when it comes to planning what to do with your retirement savings. It’s important to work closely with your tax advisor and financial professional to make sure you make the right decisions for your situation.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.