As the end of the year approaches, older investors need to pay close attention to the amount of money they have to withdraw from their retirement accounts -- whether they like it or not. Required Minimum Distributions are a fixed amount that must be taken out each calendar year once the beneficiary turns age 70½. RMD rules apply to all employee-sponsored retirement plans, including a 401(k), 403(b) and IRA -- and if you don't meet the minimum by Dec. 31 , you could wind up paying steep tax penalties. While it may sound a bit silly that the IRS forces you to spend your own money in retirement, especially to those who don't have a huge nest egg, the idea is to prevent the well-off from taking advantage of favorable tax treatment for retirement funds. After all, if you can keep growing your money tax free forever in an IRA … why not simply let it ride and leave a massive inheritance for your heirs? So, if you are lucky enough to have a big retirement account and have hit age 70½ in 2013, make sure you remember to tap that IRA this year before the tax man does on your next return. The amount of your RMD is determined by dividing the total market value of your retirement account by a life expectancy figure provided by the IRS in its Publication 590. There are also other factors, including your beneficiary status should you have a spouse who is eligible to share in your retirement funds, or your employment status, should you continue to work very late into life. But, as a general rule, required minimum distributions start at about 5% of your retirement fund and move slowly higher over time. Here's a working example: You're single and just turned 70½ in 2013, with $500,000 in your IRA. IRS gives you a divisor of 17 for your nest egg -- meaning you must withdraw $29,411 in the calendar year, or roughly 5.8%. Now for some Americans, $29,000 or so may not cover living expenses, and they will have to withdraw more or rely on Social Security to bridge the gap. But for those who have more than enough, it is wise to use the retirement funds first to avoid penalties that may be as high as 50% of what the IRS determines should have been withdrawn. So using the previous example, if you have $500,000 in your IRA and don't spend a penny, you could see Uncle Sam claim about $14,705 of your cash anyway. Remember, you can always take the minimum out and reinvest it. In many cases, this is a cheaper alternative to simply forfeiting half of your RMD to Uncle Sam. Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor's Guide to Finding Great Stocks .
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