FAQ: What is an RMD?
A required minimum distribution (RMD) is a minimum amount that must be withdrawn from a traditional Individual Retirement Account (IRA) or employer-sponsored retirement plan each year, starting the year that the account holder turns age 72 (70 1/2 if the account holder reached 70 1/2 before January 1, 2020). The purpose of RMDs is to ensure that people do not keep their money in these types of retirement accounts indefinitely and use them as a long-term savings vehicle.
To determine the amount of the RMD, the account balance of the IRA or retirement plan is divided by a life expectancy factor, which is determined by the IRS. The RMD must be taken by December 31 of each year, unless the account holder is still working and participating in the employer-sponsored retirement plan (in which case the RMD can be delayed until April 1 of the year following the year in which the account holder turns 72). If the account holder does not take the RMD as required, there is a penalty equal to 50% of the amount that should have been withdrawn but was not.
It is important to note that RMDs do not apply to Roth IRAs, as these types of accounts are funded with after-tax contributions and the money in them has already been taxed. RMDs also do not apply to other types of retirement accounts, such as 401(k)s or 403(b)s, if the account holder is still working for the employer sponsoring the plan.