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Understanding required minimum distributions

Tax treatment of your retirement plans

As you approach retirement, it’s important to understand the IRS’s required minimum distribution rule. While there are some calculations involved, it’s not as complicated as it might seem, and knowing how it works can really help you manage your retirement income.

All good things must come to an end—that includes the tax deferral on some of your qualified retirement accounts. When people reach a certain age or are about to retire, the Internal Revenue Service requires them to begin receiving payouts from these accounts These payouts are called required minimum distributions (RMD). Here are a few things you should know about what an RMD is and how it works.

The required minimum distribution is the IRS’s way of collecting taxes on the tax-deferred retirement plans you’ve been putting money into all these years, such as a 401(k) or traditional IRA. The following retirement plans are subject to the RMD rule:

  • Profit-sharing
  • 401(k) and Roth 401(k)
  • 403(b)
  • 457(b)
  • Traditional IRAs and
  • IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs

With few exceptions, the RMD rule generally applies to employer-sponsored retirement plan account owners turning 70 ½ or retiring, whichever comes later, and IRA owners turning 70 ½, regardless of when he or she retires.

You must take your first RMD in the year in which you turn 70 ½ (or retire, if applicable). This first payment can sometimes be deferred until the following April 1. Regardless, all future RMDs must be taken by every December 31. If you don’t take the distribution, there could be significant penalties.

Generally, the RMD is calculated each year by dividing the prior December 31 account balance by the applicable life expectancy factor. It’s best to consult a tax or financial advisor. You can estimate your potential RMD using this calculator provided by FINRA, Financial Industry Regulatory Authority.

No one ever wants to have to pay taxes. But some experts say to look at the RMD as a glass half full rather than half empty. The rate the IRS requires you to withdraw each year increases incrementally through your 90s. As a result, the RMD can be a safe, efficient way to manage your retirement money.


Neither New York Life Insurance Company, nor its agents, provide tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.


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