Legal Definitions - Required minimum distribution

Required Minimum Distribution (RMD)

A Required Minimum Distribution (RMD) is the smallest amount of money that an individual must withdraw from their tax-advantaged retirement accounts, such as an Individual Retirement Account (IRA) or 401(k), each year once they reach a specific age set by tax law (historically around 72 years old). The primary purpose of RMDs is to ensure that individuals eventually pay taxes on their tax-deferred savings, rather than allowing the money to grow tax-free indefinitely throughout their lifetime. While you must take at least the RMD amount, you are always permitted to withdraw more if you choose. Any money taken as an RMD is generally considered taxable income in the year it is withdrawn.

• Example 1: First-time RMD for a new retiree
  Scenario: Sarah turned 73 this year and has a traditional IRA with a balance of $500,000. This is the first year she is required to take an RMD.

  Explanation: Based on her age and the balance in her IRA, the IRS provides a specific formula to calculate Sarah's RMD amount for the year. Even if Sarah feels financially secure and doesn't immediately need the money, she must withdraw at least this calculated amount from her IRA by the end of the year to avoid penalties. This withdrawal will be added to her taxable income for the year.

• Example 2: Managing RMDs with other income
  Scenario: David is 78 years old and has been taking RMDs from his 401(k) for several years. He also receives a pension and Social Security benefits. This year, his RMD is calculated to be $25,000.

  Explanation: David must withdraw at least $25,000 from his 401(k). This amount, along with his pension and Social Security, will contribute to his total taxable income for the year. He might choose to take more than $25,000 if he has unexpected expenses or wants to make a large gift, but he cannot take less than the RMD without facing a penalty.

• Example 3: Forgetting to take an RMD
  Scenario: Maria, age 75, has a small traditional IRA that she hasn't actively managed in years. She completely forgot that she was required to take an RMD for the current year.

  Explanation: If Maria fails to withdraw her RMD by the deadline, she could face a significant penalty from the IRS. Historically, this penalty was 50% of the amount she *should* have withdrawn but didn't (though it has recently been reduced to 25% and even 10% if corrected promptly). This scenario highlights the mandatory nature of RMDs and the importance of understanding and fulfilling this obligation to avoid financial repercussions.