Required Minimum Distributions (RMDs) are a mandatory withdrawal from certain types of retirement accounts after the age of 70.5. It is an essential part of planning for retirement security - avoiding harsh tax consequences for those who do not take the money out in a timely manner.

RMDs are determined by dividing the retirement account’s prior year-end fair market value by a life expectancy factor published by the Internal Revenue Service (IRS). Generally, the amount required is based on the individual’s age, permanently setting the value for them to withdraw each year. In certain circumstances, such as the death of a spouse or beneficiaries of a trust, a minimum amount may be lower than the minimum amount set by the IRS.

The SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 changed the distribution rules for some inherited IRAs, effectively eliminating the “stretch IRA,” an estate planning strategy that stretched the tax-deferral benefits of IRAs over generations. This requires non-spousal heirs of inherited IRAs, a 401(k), or other retirement plan to take all the money out of the account within 10 years of the owner’s death.

If you are 70.5 or older and have a retirement account, it is important to take the RMDs to avoid stiff penalties. The RMD is calculated each year, but you can usually wait until the end of the year when the market may be better. If you have multiple IRAs, the calculations must be done separately but withdrawals can usually come from just one.

Finally, it is important to know the rules around RMDs and to be aware of the tax consequences that come with non-compliance. Take comfort in the fact that though the RMD will reduce retirement assets, it also provides you with essential funds, so take your time, consult a financial expert, and create a retirement plan that works for you.