Distributions from traditional 401(k)s and IRAs become required beginning shortly after you turn age 70½, and you must pay income tax on each withdrawal. The penalty for failing to take out the correct amount by the deadline is a stiff 50 percent excise tax on the amount that should have been withdrawn. Distributions are generally due by December 31 each year, but there are special rules that apply to your very first required minimum distribution.
[Read: Claim This Last-Minute Tax Break.]
You must generally take your first required minimum distribution from your 401(k)s and IRAs by April 1 of the year after you turn 70½. For example, a retiree whose 70th birthday was July 1, 2011 and who reached age 70½ on January 1, 2012 must take his first required minimum distribution (for 2012) by April 1, 2013. But there's a catch. If you wait until the last minute to take your first required minimum distribution, your second distribution will be due by December 31 of the same year. Taking two required minimum distributions in a single year could result in an unusually large income tax bill, because both withdrawals must be reported as income on your tax return.
The amount you must withdraw from your retirement accounts is typically calculated by dividing your account balance by an IRS estimate of your life expectancy. In some cases, a spouse's age should also be factored into the calculation. A required minimum distribution must be calculated separately for each IRA, but the total amount can be withdrawn from any IRA or combination of IRAs. Retirees with multiple 403(b) accounts are also allowed to total the required minimum distributions and take the withdrawal from any account. However, required minimum distributions from 401(k) and 457(b) plans must be taken separately from each account.
You can take any number of IRA withdrawals throughout the year as long as the minimum amount is met by April 1 for your first distribution and December 31 for all subsequent distributions. Some 401(k) plans allow you to delay taking required minimum distributions past age 70½ until April 1 of the year after you actually retire, unless you own 5 percent or more of the company sponsoring the 401(k) plan. However, IRA distributions are required after age 70½ even if you are still working. Distributions that exceed the amount of the required minimum withdrawal cannot be applied to required distributions in a future year.
Each withdrawal from your tax-deferred retirement account will be taxed at your regular income tax rate. However, retirees in the fortunate position of not needing the money in their IRA for living expenses can avoid paying income tax on their required minimum distribution by donating it to charity. Individuals age 70½ and older can satisfy their IRA distribution requirements by transferring up to $100,000 directly to an eligible charity during the calendar year of 2013, and no income tax will be due on the withdrawal. However, the deadline for making a tax-year 2012 charitable contribution from an IRA has already passed.