When saving for retirement a tax-advantaged retirement account is usually preferred by workers as it allows for a higher percentage of their salary to go towards savings.
Thinking of required minimum distributions (RMDs) when retirement seems so far away seems counterproductive, but being prepared and knowing, at least the gist of, what is coming is important so you an make the best possible financial decisions.
The main pro of these accounts is that compound interests, which is what will help you support yourself after working, work better the more money is invested.
IRAs and 401Ks are some of the most popular accounts to use, but knowing the rules surrounding these accounts will be the key to a smooth transition to retirement.
Do not forget to draw on your account
The first rule every retiree needs to be aware of is the RMD rule. Required minimum distributions are how the government defines the mandatory withdrawals from retirement accounts that their owners must make in order to pay taxes to the Internal Revenue Service (IRS).
These withdrawals are a minimum amount of money that retirees must take out whether or not they need it and it is calculated by dividing your retirement account balance at the end of the prior year by your current life expectancy.
These withdrawals must start on the year you turn 73, although there is a one time extension, which is , that same year, you can postpone the RMD until April of the following year. But do take into account that if you live in a state where this type of retirement income is taxed, you will pay a lot more to the IRS than you were anticipating.
The extension applies to both employer-sponsored retirement accounts like 401(k)s 403(b)s as well as individual accounts like traditional IRAs and SEPs. However, for those who are still working past their 73rd birthday, the RMD is delayed for any employer-sponsored retirement account from your current employer.
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If you decide not to take these mandatory RMDs, the IRS will make you pay an automatic tax penalty of 25% of the amount you were supposed to withdraw, on top of having to withdraw the amount and having to pay the original taxes on it. If you correct your mistake within two years, the IRS can decrease your penalty to just 10%, but the best thing to do is to be informed and pay on time.
Here is how you calculate the RMD
As we have said, the RMDs are calculated by dividing your retirement account balance at the end of the prior year by your current life expectancy.
But many people are unaware of when they are expected to pass away according to the IRS. This is not a problem, as there are many tables, provided by the IRS, to help you know the details.
Do bear in mind that life expectancy is a complex formula based on many factors, like gender, current age and statistics.
The table below is provided by the IRS so you can look up, based on your age, how long the government expects you to live.
| Age | Remaining Life Expectancy |
| 73 | 26.5 |
| 74 | 25.5 |
| 75 | 24.6 |
| 76 | 23.7 |
| 77 | 22.9 |
| 78 | 22.0 |
| 79 | 21.1 |
| 80 | 20.2 |
| 81 | 19.4 |
| 82 | 18.5 |
| 83 | 17.7 |
| 84 | 16.8 |
| 85 | 16.0 |
| 86 | 15.2 |
| 87 | 14.4 |
| 88 | 13.7 |
| 89 | 12.9 |
| 90 | 12.2 |
| 91 | 11.5 |
| 92 | 10.8 |
| 93 | 10.1 |
| 94 | 9.5 |
| 95 | 8.9 |
| 96 | 8.4 |
| 97 | 7.8 |
| 98 | 7.3 |
| 99 | 6.8 |
| 100 | 6.4 |
Here is what you can do with the money
While these RMDs are meant to ensure that the government gets their tax cut, they are also meant to ensure that you have enough money to support yourself during retirement.
But some people do not need the money and have to take it out either way, so, what can these people do?
Some options are to let the money keep growing in a high-yield savings account, or donated it to charity through a qualified charitable distribution.