Definition
A required minimum distribution is the amount that must be withdrawn each year from most tax-deferred retirement accounts starting at a set age.
How It Works
Once the account owner reaches the RMD age, they must withdraw a minimum amount each year, calculated from the account balance and a life-expectancy factor. The withdrawals are taxed as ordinary income.
Example
A retiree reaching RMD age must begin withdrawing a calculated minimum from their Traditional IRA and 401(k) each year, paying ordinary tax on it.
Who It Applies To
Owners of Traditional IRAs, 401(k)s, and similar tax-deferred accounts. Roth IRAs have no lifetime RMDs for the original owner.
Watch-Outs
Missing an RMD triggers a steep penalty. Large RMDs can push retirees into higher brackets, which is why some plan Roth conversions earlier to reduce future RMDs. A qualified charitable distribution can satisfy an RMD tax-free.
