RMDs are quite the kicker. Remember all those tax deductions we've taken over our careers when stuffing money into our traditional 401(k)s and IRAs?

Uncle Sam does. And Uncle Sam wants his cut.

When using traditional retirement accounts, you get a tax break when you put in money and that money grows tax-deferred (you don't encounter a taxable event when you sell an appreciated asset within such a tax-advantaged account). However, you pay taxes on the money you withdraw from the account and it is taxed as ordinary income.

RMDs (Required Minimum Distributions) are the government's way of getting paid after all this time of you saving and investing. By setting a minimum amount that you have to withdraw once you hit age 72 (as per current tax codes), you are forced to at least withdraw and pay taxes on that amount.

What if you don't want to? I've got bad news for you: penalties. Not 10%. Not even 20%. It's a 50% penalty (i.e. you REALLY don't want to neglect RMDs).

Typically, you'd want to plan ahead and reduce your income in those years to avoid the higher tax brackets you may be subject to (caused by the RMDs). There are several tactics available, mostly centered on withdrawing money prior to 72 in order to "spread out" the tax burden you'll encounter.

Did this answer your question?