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Required Minimum Distribution (RMD)

Required Minimum Distribution (RMD) is a term commonly used in the Individual Retirement Account (IRA) and retirement plan industry in the United States. It refers to the minimum amount that a retirement plan account holder must withdraw annually starting the year that he or she reaches 72 (as per the SECURE Act, effective January 1, 2020, which moved the age from 70½ to 72).

Here are some key points about RMDs:

  1. Starting Age: The account holder must start taking RMDs by April 1 of the year following the year in which they turn 72. For subsequent years, the RMD must be taken by December 31.
  2. Calculation: The RMD amount is calculated based on the account balance at the end of the previous year and life expectancy factors set by the IRS.
  3. Types of Accounts: RMD rules apply to employer-sponsored retirement plans, including 401(k) plans, 403(b) plans, and 457(b) plans, as well as traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.
  4. Tax Implications: RMDs are generally subject to ordinary income tax, as the funds withdrawn were typically contributed on a pre-tax basis and tax was deferred.
  5. Penalties: Failure to withdraw the RMD by the deadline results in a penalty of 50% of the amount not withdrawn.

Note that Roth IRAs do not require withdrawals until after the death of the owner, as these accounts are funded with after-tax dollars and qualified distributions are tax-free. In contrast, Roth 401(k)s are subject to RMD rules, but the distributions are generally tax-free.