I have a confession to make: I hate making financial decisions.
I may hold economics and finance degrees, but when it comes to the nagging decisions that have to be made each day — well, let's just say my husband claims to have found me huddled under the bedsheets, with unpaid bills and unsent checks lying on a nearby desk.
He may be exaggerating a bit, but the truth of the matter is, these decisions aren't easy for any of us. Because my work revolves around financial literacy, I'm often the one who gets the call when one of my relatives is facing an important financial decision that can't be ignored any longer.
As my parents' generation eases into their 70s, I'm hearing the same question quite frequently: What the heck is a "required minimum distribution" and what am I supposed to do about it?
About three years ago, my mom called me shortly after she had turned 70½. She had received a letter and forms from the financial institution where most of her retirement savings were invested. The paperwork notified her that, because she was 70½, the Internal Revenue Service would now require her to start drawing down her 401(k) and Individual Retirement Accounts (IRAs) by taking at least a minimum distribution each year.
That might not sound like a big deal to most people and, in fact, my mom is quite capable of making her own financial decisions. But the letter happened to arrive just as many other things in her life were sort of coming undone. My father was dying and the stock market was reeling, and this was one more thing to add to her pile of worries.
The forms themselves did little to ease her mounting frustration. The papers included a giant box with "helpful to know" facts about taking these required distributions. I think she must have hit the panic button somewhere between "It is your responsibility to ensure that your withdrawals comply with IRS rules and deadlines" and "Drawing your total IRA balance down to zero could trigger account closing fees."
When you're 70-plus and facing the rest of your life without a spouse or an income, even a relatively simple financial decision like this one may force you to make a whole series of other decisions.
So what is this "required minimum distribution," or RMD?
Many of us have built our retirement savings through tax-deferred vehicles, like employer-sponsored 401(k) accounts and traditional IRAs, which are personal retirement savings accounts you open at a financial institution of your choice. Because the federal government allowed you to spend your entire working life socking untaxed income away into these accounts, the IRS has to recoup some of that lost tax revenue eventually. Unless you keep working, that point is currently age 70½.
The RMD is the smallest amount of money the IRS will require you to withdraw from your retirement accounts each year, starting April 1 of the year after you turn 70½. (In subsequent years, you'll have to take withdrawals by Dec. 31 each year.)