Friends in retirement | kali9/Getty Images

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Most taxpayers with retirement accounts enjoy tax-deferred earnings for many years, but eventually the IRS expects these accounts to be drawn down by their owners.

When you turn 70 1/2, you must — that’s must — begin taking annual withdrawals from your tax-deferred retirement accounts, such as a traditional IRA, workplace 401(k) or self-employed retirement plan.

If you went six months past your 70th birthday last year, you have until April 1 to make your first of these withdrawals, known as required minimum distributions, or RMDs.

Why withdraw?

The penalty is severe if you don’t follow the rules. Failure to withdraw triggers an excess-accumulation tax; you’ll have to pay 50 percent of the required distribution that you didn’t take.

The payouts are designed to ensure that most of your retirement benefits are paid to you during your lifetime. You can use Bankrate’s calculator to determine your required minimum distribution.

Let’s say you didn’t withdraw the required $1,000 from your traditional IRA. Your tax hit would be $500. For a taxpayer in the 25 percent income tax bracket, that’s twice what you would have paid in taxes if you’d simply followed the RMD rule.

If you can convince the IRS that your distribution shortfall was due to “reasonable error” and that you’re taking steps to rectify the situation, the agency could waive the penalty. In that case, file Form 5329 (part IX), go ahead and pay the excess-accumulation tax and attach a letter of explanation. If the IRS agrees that you shouldn’t be penalized, it will refund the excess tax.

How to determine your distribution

The IRS has created three tables based on life expectancies to figure your minimum withdrawal amount, which is a percentage of your IRA based on your age, and these can be found in IRS Publication 590-B.

  • Retirement-plan beneficiaries use the first table.
  • Married account owners with spouses more than 10 years younger use the second The spouse’s age allows these withdrawals to be spread over a longer life expectancy, so the account owners don’t have to take out as much.
  • Most account holders use the third table, known as the “uniform lifetime table.” It is for singles and for married savers with spouses closer to their own ages.

Withdrawal exceptions

The IRS does allow a few instances in which you don’t have to touch retirement money at 70 1/2:

  • If all your retirement savings are in a Roth IRA, you’re exempt from the withdrawal rule. Earnings in Roth accounts are tax-free, and you can leave your money in there as long as you like.
  • If you are still working, you can wait until you retire before you collect from your company pension or 401(k). But if you have other, nonwork-related accounts, such as an IRA other than a Roth, or if you have a workplace retirement plan from a former employer, you have to start taking money from those now.
  • If you already withdrew the minimum required amount last year when you reached age 70 1/2, you will be covered for the 2016 required distribution year. You will need to take your 2017 RMD amount by Dec. 31.

Other withdrawal rules

Even if you’ve been tapping retirement accounts before you became a septuagenarian, now you must keep a close eye on exactly how much you take out. All subsequent withdrawals must meet the IRS mandatory amounts.

You can always take out more than the required amount. But that won’t affect distributions in future years. Say, for example, your required withdrawal this year is $1,500 but you take out $2,000. You can’t carry that $500 over to count against the next required distribution.

If you have multiple retirement accounts, then you must figure the minimum withdrawal amount for each, but you don’t necessarily have to raid them all. If you have several IRAs, you can add the separate amounts and take the total from just one. However, you do have to take required minimum distributions from each workplace account separately.

The IRS will let you take your required distribution in installments. Just make sure that these disbursements total at least the yearly minimum amount you’re obligated to withdraw.

Spending not required

While the IRS says you must take a specified amount of money out of your traditional IRA or other similar retirement plan, that doesn’t mean you have to spend it.

If you don’t need that money, you can redeposit any or all of the distribution in another nonretirement savings account where it can keep earning interest for you.

And if you want to give your money to a worthy cause, you can do that, too.

Thanks to a tax break that became permanent with passage of the Protecting Americans from Tax Hikes, or PATH, Act of 2015, older IRA owners can directly transfer their RMD amounts, or as much as $100,000 annually, to a qualified charity. This meets the withdrawal requirements, but the money is not taxable because it goes straight to the charity without passing through IRA owners’ hands.

If you need a good place to stash your required IRA withdrawals, look for the best rates on certificates of deposit or money market accounts at Bankrate.

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