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Don't forget to take MRDs by Dec. 31

Failure to take minimum required distributions on time may mean tax penalties.

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December 31 is fast approaching. Have you taken your minimum required distribution (MRD) from your retirement account? Lots of people have not. Be warned: This can be a costly mistake, one that may result in significant tax penalties.

Beginning when you turn 70½, IRS regulations generally require you to withdraw a minimum amount of money each year from your tax-deferred retirement accounts, like traditional IRAs and 401(k) plans, or pay penalties of up to 50% of your MRD.1 This is why it’s important that you understand how MRDs work, and the timing of distributions.

How the amount is determined

Minimum required distributions, sometimes referred to as required minimum distributions (RMD)s, are determined by your age, your account balance, and your life expectancy. If you have a spousal beneficiary who is more than 10 years younger than you and is the sole beneficiary for the entire distribution year, you can base your MRD on your joint life expectancy.

For inherited IRAs, the rules are different. (Learn more.)

  Uniform lifetime table for minimum required distributions
  Age 70 75 80 85 90 95 100 105
  Years 27.4 22.9 18.7 14.8 11.4 8.6 6.3 4.5
  Min. % 3.6% 4.4% 5.3% 6.8% 8.8% 11.6% 15.9% 22.2%
 The table above shows the minimum required distribution periods (based on age and the expected number of years for distributions) and percentages for tax.

Deadlines for withdrawals

For traditional IRAs, you must begin taking minimum required distributions by April 1 of the year following the year in which you turn 70½. The same generally holds true for 401(k) plans and other qualified retirement plans. However, if you wait until after December 31, you will have to take two MRDs in one year, which could affect your income tax bracket or Medicare eligibility.

If you are over 70½ and still working, you can generally delay your MRDs from your 401(k) until you retire.2 For all subsequent years, distributions must be made annually by December 31. Fidelity customers must complete MRD transactions by December 31, but please allow time for any trades to settle if you are selling investments to take your MRD.

Tax penalties

Failure to withdraw the MRD annually by the applicable deadline may result in substantial tax penalties, as much as 50% of the amount not distributed. All withdrawals of earnings and pretax contributions are taxed as ordinary income.

Learn more

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1. Minimum required distribution rules do not apply to Roth accounts during the lifetime of the original owner or to participants in workplace retirement plans who are less than 5% owners until they retire. MRDs are also required from 403(b) and 457(b) plans, as well as SEP IRAs, SARSEPs, and SIMPLE IRA plans.
2. See note 1.
Information provided is general in nature and should not be considered tax advice. Fidelity does not provide tax or legal advice. You should consult an attorney or tax professional for information regarding your specific situation.
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