What is Required Minimum Distribution (RMD)?
Required Minimum Distribution (RMD) refers to the minimum amount that a retirement account holder must withdraw from their retirement accounts annually, starting at a specified age. This rule primarily applies to accounts such as Traditional IRAs, 401(k)s, and other tax-deferred retirement plans. The main aim is to ensure that individuals do not defer tax obligations indefinitely on their retirement savings.
Key Points about RMD:
- RMDs typically begin at age 72 (as of 2023), though individuals may opt to delay withdrawals if they are still employed and do not own more than 5% of the business sponsoring the plan.
- The amount required is calculated based on account balance and life expectancy. The IRS provides tables that assist in this calculation.
- Failure to take the RMD can result in hefty penalties, up to 50% of the amount that should have been withdrawn but wasn’t.
- RMDs do not apply to Roth IRAs during the account holder's lifetime, making them a beneficial estate planning tool.
It's essential for retirees to understand their RMD obligations to manage their withdrawals effectively and avoid unexpected tax liabilities.