Required minimum distribution rules for retirement accounts

Certain retirement accounts are subject to required minimum distribution rules upon reaching a certain age, typically 70 1/2.  At this point, the account participant is required to withdraw a certain amount from the account(s) each year, and these withdrawals are usually subjected to income tax.  The participant may withdrawal more than the required amount and still be in compliance with the rule.  The rules apply to IRA accounts, SEP-IRA accounts, SIMPLE IRA accounts, 401K plans, 403B plans, 457 plans, and other defined contribution plans.  Note that ROTH IRAs are not subject to the rule in most cases.

The amount of the required minimum distribution is based upon age and marital status, and is determined based upon mortality tables.  The details of the calculation will not be covered here, however most account custodians will calculate the required minimum distribution for the account owner.

Retirement account withdrawals

Retirement account withdrawals

How should withdrawals be taken from retirement accounts?  Factors include investment style and the amount which is withdrawn each year.  The manner in which  withdrawals are taken from retirement savings account has a significant impact on how long these assets will last.  A common practice in the financial services industry is to use Monte Carlo simulations to estimate probabilities of certain outcomes occurring with respect to how withdrawals will affect the retirement assets over time.  In this article we will illustrate how retirement account withdrawals can have different results by using two simple examples.