During the course of your career, you may have managed to build up a tidy nest egg, most likely augmented by tax-favored saving devices. For instance, you may have accumulated funds in qualified retirement plans, like 401(k) plans and pension plans, and traditional and Roth IRAs. Assuming you don’t need all the funds to live on, your goal is to preserve some wealth for your heirs.

Can you keep what you want? Not exactly. Under strict tax rules imposed by the IRS, you must begin taking required minimum distributions (RMDs) from your retirement plans and IRAs in your seventies. And you must continue taking RMDs year in and year out without fail. Don’t skip this obligation for 2016, as the penalty for omission is severe.

When should you begin taking distributions?

RMD rules apply to all employer-sponsored retirement plans, including pension and profit-sharing plans, 401(k) plans, 403(b) plans for not-for-profit organizations and 457(b) plans for government entities. The rules also cover traditional IRAs and IRA-based plans such as SEPs, SARSEPs and SIMPLE-IRAs.

The required beginning date (RBD) for RMDs is April 1 of the year after the year in which you turn age 70½. For example, if your 70th birthday was June 15, 2016, you must begin taking RMDs no later than April 1, 2017. This is the only year where you’re allowed to take an RMD after the close of the year for which it applies. (Be aware that delaying the first RMD will result in two RMD withdrawals during that tax year.) The deadline for subsequent RMDs is December 31 of the year for which the RMD applies.

To calculate the RMD amount, you divide the balance in the plan account or IRA on December 31 of the prior year by the factor in the appropriate IRS life expectancy table. For example, use the:

• Joint and Last Survivor Table if the sole beneficiary of the account is your spouse and he or she is more than 10 years younger than you,
• Uniform Lifetime Table if your spouse isn’t your sole beneficiary or your spouse isn’t more than 10 years younger than you, or
• Single Life Expectancy Table if you’re the beneficiary of the account.

Although you must determine the RMD separately for each IRA you own, you can withdraw the total amount from just one IRA, or any combination of IRAs that you choose. However, for qualified plans other than a 403(b), the RMD must be taken separately from each plan account. Of course, you may withdraw more than the required amount, but this will erode your savings in retirement.

What’s the penalty for failing to take RMDs?

The penalty is equal to a staggering 50% of the amount that should have been withdrawn (reduced by any amount actually withdrawn). For example, if you’re required to withdraw $10,000 this year and take out only $2,500, the penalty is $3,750 (50% of $7,500). Plus, you still have to pay regular income tax on the distributions when taken. Keep in mind that with the additional income there are other tax issues, such as a potential tax on net investment income (NII). RMDs don’t count toward NII but will increase your modified adjusted gross income for purposes of this calculation. 

As a general rule, you must take RMDs from all qualified plans and IRAs. But you don’t have to withdraw an RMD from a qualified plan of an employer if you still work full-time for the employer and you don’t own more than 5% of the company. There’s no comparable exception for traditional IRAs. Although you don’t have to take RMDs from a Roth IRA you created, your heirs must take lifetime distributions from the Roth IRA they’ve inherited.

Don’t procrastinate!

Typically, retirement savers will wait until December to arrange to take RMDs from qualified plans and IRAs. But that could be dangerous. It’s easy to be distracted during the holiday season and forget about the obligation. Furthermore, it can take several days, if not longer, for trading and settling funds. And haste can lead to errors and miscalculations that could cost you.

A better approach is to take your time. Make arrangements for RMDs well in advance of the December 31 deadline. Finally, confirm the required amounts with your financial advisors to ensure you’re not overpaying yourself.