CPA Dave Young discussed the importance of taking the required minimum distribution from your retirement account at a certain age Monday during News 8 at Sunrise.

“When a person reaches 70-1/2 they have to start beginning to take money out of their qualified accounts,” said Young. “It’s their IRA, it’s a 401(k), it’s a Simple Plan. You have a very limited amount of time to take that money.”

Young explained how the required minimum distribution, or RMD, works. “There’s going to be a chart. Today, you’d look at your December 31, 2016 IRA balances and you’re going to go to a chart that the IRS publishes, and you’re going to take all of your IRA accounts, add them all together and then divide it by your divisor. So, as an example, if you’re 70-1/2 roughly it’s going to be 3.65 percent of the amount in your IRA accounts of the prior year. So if you have $100,000 it’s going to be about $3,650 that needs to come out of your accounts. If you have five IRA accounts, you’d add all five up. You don’t have to take the money from each individual account, but one account covering all five accounts.”

The rule is once you turn 70-1/2 you must withdraw your required minimum distribution by April 1 of the following year. Your second RMD must come out by December 31 of that year, then each subsequent December 31 going forward.

The distribution will be taxed. “it’s going to be taxed as ordinary income, so it’s going to come out and it’s going to be whatever your federal marginal tax rates are, except in New York State,” Young said. “The first $20,000 coming out of your IRA is going to be tax free for New York State.”

For those who contribute to a Roth IRA, you will not be required to take a minimum distribution. If you pass away and a non-spouse inherits your Roth IRA and continues to hold it, they will be required to take an RMD, though there will be no tax. Young called that a wrinkle worth noting.

There is a significant penalty for those who do not take their required minimum distribution. “So back to my original scenario,” said Young. “You were supposed to take out $3,650. You’re going to be faced with a $1,825 penalty if you fail to take out your RMD. So it’s fifty percent of the amount you should have taken. There is a way to get out of the penalty if you file a form with the IRS, a 5329. You have to have reasonable cause. Maybe you were ill, maybe something happened, but you have to make sure, the biggest thing is make you take your RMD by the end of the year. The penalty is significant.”

To get answers to your questions on this topic, consult a trusted CPA or visit the New York State Society of CPA’s website, click here.