Required Minimum Distributions (RMDs) refer to the minimum amount of money that must be withdrawn from certain tax-advantaged retirement accounts, such as traditional IRAs and 401k plans, starting from the age of 72 (previously 70.5 years old).
The purpose of RMDs is to ensure that individuals withdraw a portion of their retirement savings annually and pay taxes on the amount withdrawn. If an individual fails to take an RMD or withdraws less than the required amount, they may face a penalty tax of up to 50% of the amount that was not withdrawn.
The amount of the RMD is calculated based on the individual’s life expectancy and the balance in their retirement account at the end of the previous year. The RMD amount may change from year to year based on the account balance and life expectancy.
RMDs apply to traditional IRAs, 401(k) plans, 403(b) plans, 457 plans, and other defined contribution plans. Roth IRAs are not subject to RMDs during the account owner’s lifetime, but inherited Roth IRAs are subject to RMDs.
It is important for individuals to plan for RMDs and factor them into their retirement income strategy to avoid potential penalties and ensure that they are taking the required withdrawals from their retirement accounts.