Required Minimum Distribution (RMD)
Quick Definition
The minimum amount that must be withdrawn annually from tax-deferred retirement accounts starting at age 73.
Key Takeaways
- RMDs begin at age 73 (rising to 75 in 2033) for traditional retirement accounts
- Roth IRAs have no RMDs during the owner's lifetime
- The penalty for missing an RMD is 25% (or 10% if corrected promptly)
- Roth conversions before RMD age can reduce or eliminate future mandatory withdrawals
What Is Required Minimum Distribution (RMD)?
Required Minimum Distributions (RMDs) are mandatory annual withdrawals from tax-deferred retirement accounts (traditional IRAs, 401(k)s, 403(b)s, and most other employer-sponsored plans) that begin at age 73 under the SECURE 2.0 Act (rising to age 75 in 2033). RMDs ensure the government eventually collects income taxes on money that received tax-deferred treatment during accumulation. The annual RMD amount is calculated by dividing the account balance (as of December 31 of the prior year) by a life expectancy factor from IRS tables. Failure to take the required distribution results in a 25% excise tax on the amount not withdrawn (reduced to 10% if corrected within 2 years). Roth IRAs are exempt from RMDs during the owner's lifetime, making them a powerful estate planning tool.
Required Minimum Distribution (RMD) Example
- 1A 73-year-old with $1,000,000 in a traditional IRA has an RMD of approximately $37,740 (dividing by 26.5 life expectancy factor).
- 2Missing an RMD of $40,000 triggers a $10,000 excise tax (25%), reduced to $4,000 (10%) if corrected within the correction window.
- 3Converting traditional IRA funds to a Roth IRA before age 73 eliminates future RMDs on those assets, though conversion taxes apply.
Related Terms
Traditional IRA
A tax-advantaged individual retirement account where contributions may be tax-deductible and earnings grow tax-deferred.
Qualified Distribution
A withdrawal from a tax-advantaged retirement account that meets IRS requirements and avoids penalties.
Tax-Deferred
An investment or account where taxes on earnings are postponed until funds are withdrawn, typically in retirement.
Backdoor Roth IRA
A strategy allowing high-income earners who exceed Roth IRA income limits to contribute indirectly by converting traditional IRA contributions.
FAFSA (Free Application for Federal Student Aid)
The federal form used to determine eligibility for financial aid including grants, loans, and work-study programs.
401(k)
An employer-sponsored retirement savings plan with tax advantages, often including employer matching contributions.
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