What is Required Minimum Distribution (RMD)?
Required Minimum Distribution (RMD) refers to the minimum amount that a retirement plan account holder must withdraw annually from their retirement accounts starting at age 73, according to the IRS regulations. RMDs apply to traditional IRAs, 401(k)s, and other defined contribution plans but do not apply to Roth IRAs during the account holder's lifetime.
Why are RMDs Important?
RMDs are crucial as they ensure that individuals do not defer taxes on their retirement savings indefinitely. The government mandates these distributions to collect tax revenue on the income that has been sheltered in these accounts.
How is RMD Calculated?
To calculate your RMD, divide the retirement account balance as of December 31 of the prior year by the IRS’s life expectancy factor corresponding to your age. The uniform lifetime table is commonly used for this calculation, though special rules apply for those with a spouse who is more than ten years younger.
Consequences of Not Taking RMDs
Failing to take the required minimum distribution can lead to severe tax penalties, specifically a 50% excise tax on the amount that was not distributed. Therefore, it's essential for retirees to plan and ensure they meet RMD requirements to avoid these penalties.