Required minimum distributions (RMDs) are the smallest amount that retirees must withdraw from their retirement accounts every year starting at around 72 years of age.

As you approach retirement, it’s important to start thinking about how RMDs will affect your finances. And even if retirement is far in the future, it’s important to know how RMDs work so you can plan your finances effectively in advance.

Here are four important things you should know about RMDs.

1. RMDs are taxed. 

The IRS requires taxpayers to take RMDs and pay taxes on the withdrawal amount to prevent tax evasion. They’re taxed according to your income tax rate.

2. You need to calculate your RMDs for each account. 

You must take RMDs from retirement accounts, including IRAs, 401(k)s, 403(b)s, 457(b)s and profit-sharing plans.

You can use this calculator to get an estimate of how much your RMDs might be.

3. Missing the RMD deadline comes with a hefty penalty. 

You’ll need to take your first RMD from your account starting April 1 once you’ve turned 72 (or 72 and a half if you were born before July 1, 1949). All subsequent RMD deadlines are December 31.

If you miss the deadline for your RMD, the amount you did not withdraw is subject to a 50% tax penalty.

4. You might be able to delay taking RMDs. 

For example, people who are still working after 72 years of age do not need to take RMDs from their employer-sponsored 401(k) until they retire, so long as they own less than 5% of the company.

Retirement planning can seem complicated. Don’t hesitate to reach out with any questions about your RMDs and retirement strategy.