ONCE you hit a certain age – it would be wise to start withdrawing from your retirement accounts before penalties kick in.
At some point, you’ve probably heard that you’ll get slapped with a penalty if you withdraw from your retirement accounts too prematurely.
But perhaps you didn’t know that you could get a penalty if you hold onto funds in your retirement accounts for too long.
In fact, a required minimum distribution (RMD) will force you to start withdrawing from your retirement accounts to avoid paying penalties.
But if you aren’t yet a senior – you don’t have to worry about this yet.
That’s because the RMD doesn’t kick in until the year you hit age 72.
The RMD can apply once the person officially turns 72 if it’s an individual retirement account (IRA), or the account owner holds a 5% stake in a business sponsoring the retirement plan.
Along with IRAs, another major retirement plan is a 401k.
A big difference between the two is typically a 401k offers an employer match, while an IRA account allows you to choose between more investment options.
According to Internal Revenue Service (IRS), the RMD gets calculated based on the previous year’s end balance for each of your retirement accounts divided by a “life expectancy factor.”
Brokerage Charles Schwab has a calculator you can use so you can get an estimate of the RMD.
For example, for someone who has an account balance of $100,000, with a spouse as the primary beneficiary, the RMD is over $4,100.
Those who fail to meet the RMD deadline, or if the amount withdrawn isn’t sufficient enough, are subject to a 50% excise tax.
And it’s important to note that seniors are allowed to withdraw more than RMD without penalty.
Moreover, withdrawals must be done annually after the year you hit 72 to bypass penalties.
We explain how working while collecting Social Security impacts your benefits.
And check out why the Social Security hike in January is bad for claimants.
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