It seems rather unusual to celebrate a half birthday. Why is this important? It is time to celebrate that you made it and start taking you Required Minimum Distribution (RMD). It means that you must take out some money from your retirement account like a traditional IRA and you have the option to spend it.
Of course you will have to pay taxes on this distribution which is why the government established this RMD requirement. Since the money you put in this account was not initially taxed and was allowed to grow without paying taxes, sooner or later the government would like some tax money from it. Why would the government have this rule? To prevent money from transferring generation to generation without ever being subjected to an income tax.
This is really important because if you do not take this RMD the government will penalize you with a penalty tax of up to 50% of the amount you should have withdrawn. You can either take the RMD, pay income tax, and spend the remainder or not take it and pay a penalty tax.
The first RMD must be taken no later than April 1st of the year you turn 70 1/2. It is very likely that you will be taking another RMD by December 31st of the same year. A RMD is required in each subsequent year.
It is possible to delay paying the RMD? This is usually done by:
- Investing in a Roth IRA instead of a Traditional IRA
- Working past age 70 1/2
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