People say that you have to spend your money while you are alive, since you can't take it with you when you pass away. This is certainly true when it comes to your 401k, or other tax-deferred savings account. It is very important that you understand the required minimum distributions (RMDs), also known as the mandatory 401k withdrawal rules, therefore.
The RMD Rules:
As soon as you turn 70 1/2, the IRS will require you to start taking your RMDs, regardless of whether you have a 401k, or any other type of retirement account. Additionally, you will be taxed on each of your withdrawals. The reason for this is because the point of those accounts is not to enable you to hoard your money. They want to make sure that they get paid as well. Any RMD is classed as income, and you will be taxed at the usual rate for that.
Two important exceptions exist and one is that Roth IRAs do not have an RMD, so long as they are not an inherited Roth IRA. The other exception is for those who continue to work after reaching the age of 70 1/2, without owning over 5% of the company that employs them. In that case, they can delay payments until they retire. For all other accounts, including the 401k, however, you must take RMDs.
Mandatory 401k Withdrawal Rules' Deadlines:
Each year, you must have taken your RMD before December 31st. You can, however, delay this to April if it is the first time for you to withdraw. So, for example, if you would turn 70 1/2 in May, you could defer your payment to April of the following year. However, you must be careful about delaying, as it may push you up into a more expensive tax bracket, because your income will technically increase.
Distribution Amounts:
The mandatory 401k withdrawal rules tell you what the minimum withdrawal amount is. You can take out more than that, should you so choose. You can even decide to take out less. If you do the latter, however, you will have to pay a 50% tax penalty on the amount you should have withdrawn.
To calculate your RMD, the IRS uses your balance as of December 31st the year before you turned 70 1/2, and an estimation of your life expectancy. There is an exception: if your spouse is at least 10 years your junior and she is the beneficiary, a different life expectancy will be used.
You must also calculate your RMD for every different account that you have. Some retirement accounts, such as the 403(b), allow you to combine all the RMDs and take it out from a single account, but this is not possible with the 401k.
The IRS provides a number of good worksheets online that enable you to calculate what your personal RMD is. Alternatively, you can speak to your plan administrator, or to your retirement account's custodian. Do make sure that you request your free copy of "Distributions from Individual Retirement Arrangements", which is (publication 590-B), from the IRS website, or via their telephone helpline.