Required minimum distribution (RMD)

Also called minimum required distribution

The minimum amount that must be withdrawn each year from most tax-deferred retirement accounts once the owner reaches an age set by federal law.

What it means

Tax-deferred accounts such as traditional IRAs and 401(k)s cannot shelter money forever. Starting at an age set by federal law, which has changed several times, owners must take a minimum withdrawal each year and pay income tax on it. Roth IRAs have no RMDs during the original owner’s lifetime.

The amount is generally the account balance at the end of the prior year divided by a life expectancy factor from an IRS table. The first RMD can be delayed until April 1 of the following year, though that means taking two in one year. Missing an RMD triggers a steep excise tax on the shortfall. Inherited accounts follow their own rules.

Formula

RMD = Prior year-end balance ÷ Distribution period

Prior year-end balance = account value on December 31 of the previous year
Distribution period = life expectancy factor from the applicable IRS table

Example

For example, if an IRA held $500,000 at the end of last year and the applicable IRS factor were 25.0, this year’s RMD would be $500,000 ÷ 25.0 = $20,000, taxed as ordinary income.

How it’s used

Planning retirement withdrawals and taxes
Managing inherited retirement accounts
Deciding between traditional and Roth savings

Good to know

Several accounts of the same type may allow the total RMD to be taken from one of them; IRAs allow this, but 401(k)s generally do not.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.