What Is a Required Minimum Distribution (RMD)? – A required minimum distribution, also known as an RMD, is the minimum amount you’re required to withdraw annually from tax-deferred accounts once you reach a certain age. Here’s how it works. Tax-deferred accounts, like traditional IRAs or 401 s, allow you to contribute money pretax, which lets you grow more savings for retirement.
The longer you wait to withdraw money, the longer it can grow without being taxed. But you can’t avoid paying taxes on that money forever. At a certain point, the IRS requires you to start taking an RMD, which is usually taxed on withdrawal. You typically have to take the first RMD by April 1st of the year following the year in which you turn 70 and 1/2.
After that first withdrawal, you’re required to take the RMD by December 31st every year. Your RMD is calculated based on a variety of factors, including age and account balance. Beneficiaries may also impact your RMD if your spouse is listed as a 100% primary beneficiary and is more than 10 years younger than you.
Because of these factors, your RMD may vary from year to year and from account to account. Taking the RMD is not something you want to forget. If you miss your RMD, the IRS charges a 50% penalty on the amount that should have been taken. So, for example, if your RMD was $5,000 and you didn’t take it by the deadline, the IRS would level a penalty of $2,500.
Ouch. To prevent this penalty, create a reminder or set up recurring distributions on your account. A little planning to make sure you take your RMD can save you a big headache.