Required Minimum Distribution

What is a Required Minimum Distribution (RMD)?

          Required Minimum Distributions (RMDs) are mandatory annual withdrawals that the federal government requires from traditional IRAs and employer-sponsored retirement plans starting at age 73 (or age 75 for those turning 73 after December 31, 2032).

          These distributions are calculated to facilitate the gradual withdrawal of retirement account assets over your lifetime. The purpose of RMD rules is to prevent individuals from indefinitely deferring taxes by accumulating retirement funds and passing them on as an inheritance. Instead, RMDs are designed to generate taxable income during your lifetime, helping to ensure that retirement savings are used for retirement purposes and that taxes are paid on distributed funds.

When Must Required Minimum Distributions (RMD) be Taken?

            Your first required minimum distribution (RMD) from a traditional IRA is for the year you turn age 73 (age 75 for individuals who attain age 73 after December 31, 2032). However, you have some flexibility regarding when you take this initial distribution. You may withdraw it at any time during the year you turn 73 or delay it until as late as April 1 of the following year.

             This April 1 deadline is known as your "required beginning date." After your first RMD year, subsequent RMDs generally must be taken by December 31 of each year.

              If you choose to delay your first distribution until April 1 of the following year, you will need to take two distributions during that year: the delayed distribution for your first RMD year and the distribution required for the second year.

What if You Fail to Take Your Required Minimum Distribution? 

               You may always withdraw more than the required minimum distribution (RMD) from your IRA or retirement plan. However, if you fail to take the full RMD for a given year, or do not take it by the applicable deadline, you may be subject to a federal excise tax. Under current law, the excise tax is generally 25% of the amount by which the required distribution exceeds the amount actually distributed during the year. In certain circumstances, the penalty may be reduced if the shortfall is corrected in a timely manner.

What is the Formula to Calculate Your Required Minimum Distribution?

             The formula for calculating an RMD is relatively straightforward. Generally, you divide your IRA account balance as of December 31 of the previous year by the applicable life expectancy factor from the IRS life expectancy tables. The resulting amount is your required minimum distribution for the year.