What Is Required Minimum Distribution?
A required minimum distribution is an amount of money that the IRS mandates you to withdraw from traditional IRAs, employer-sponsored retirement account, or SIMPLE individual retirement account each year.
Required Minimum Distribution (RMD) is the lowest amount a tax-deferred retirement plan account owner must withdraw and pay income taxes, starting from the year they clocked 72. It exists to prevent people from using the retirement plan account to escape paying taxes.
Not all retirement plans are liable to follow the required minimum distribution. The following retirement plans are those where RMD is applicable:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- Rollover IRAs
- Most 401(k) and 403(b) plans
- Most small business accounts
It should be noted that RMD is merely the minimum amount one is expected to withdraw and not the maximum. That means an account owner may choose to withdraw an amount beyond the set minimum amount. The account owner can decide to withdraw all the funds at once. However, the tax could be hefty.
The amount that makes up the required minimum distribution depends on the account balance of the retirement plan and the life expectancy of the owner as defined by the IRS. RMD, therefore, is calculated by dividing the account’s year-end fair market value by the owners’ life expectancy.
To calculate your RMD, you need to take the following steps:
- Visit the IRS website
- Find your age on the IRS Uniform Lifetime Table
- Locate the “life expectancy factor” that corresponds to your age
- Divide your retirement account balance as of December 31 of the previous year by your current life expectancy factor
Required Minimum Distribution Example
For instance, John is a tax-deferred retirement plan account owner aged 75 years. At the close of last year, John had a balance of $302,000. The life expectancy factor for people aged 75 as set by the IRS is 22.9. To calculate the minimum amount he must spend this year, John would multiply $302,000 by 22.9, which equals $13,187.77. That means John is to withdraw at least the sum of $13,187.77.« Back to Glossary Index