Macro Mondays: Required Minimum Distribution (RMD)

Welcome to another edition of Macro Mondays! So when we reach retirement, it's nice that we can have a cushion of savings in a 401(k) or IRA of some kind. However, if the retirement account is not 'Roth' in nature, there are some major tax implications if one does not take out money on a scheduled basis after age 70 1/2.

With tax-deferred accounts, the IRS grows impatient and wants to tax them as soon as they are able, so to encourage retirees to withdraw money to tax, they enforce what is known as the 'required minimum distribution' amount on retirement accounts. 

What is the 'Required Minimum Distribution' for retirement accounts?

A required minimum distribution (RMD) is the amount that traditional, SEP or SIMPLE IRA owners and qualified plan participants must begin distributing from their retirement accounts by April 1 following the year they reach age 70.5. RMD amounts must then be distributed each subsequent year based on the current RMD distribution calculation amounts.

So how will I know what my RMD is?

These required minimum distributions are determined by dividing the prior year-end fair market value of the retirement account by the applicable distribution period or life expectancy. Some qualified plans allow certain participants to defer beginning their RMDs until they retire, even if they are older than age 70.5. Qualified plan participants should check with their employers to determine whether they are eligible for this deferral. Also, Roth IRAs do not require withdrawals until after the death of the owner.

How is the RMD Calculated?

It should be noted an investor is allowed to withdraw at least the required minimum distribution but may withdraw any amount above that number. If an investor wants to withdraw 100% of his account in the first year, he is legally allowed to make that withdrawal. When calculating a required minimum distribution for any given year, it is always wise to confirm on the website for the Internal Revenue Services (IRS) that you are using the latest calculation worksheets. Different situations call for different calculation tables. For example, IRA account holders whose spouse is the only beneficiary of the account and is more than 10 years younger than the account holder use one table, while IRA account holders whose spouse is the only beneficiary of the account and the same age as the account holder use a different table.

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To learn more about the RMD and other investing terms, be sure to check out  more

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