required minimum distribution
The minimum amount the IRS requires you to withdraw annually from tax-deferred retirement accounts starting at age 73, ensuring taxes are eventually collected.
Example
“At age 73, he was required to take his first RMD from his Traditional IRA whether he needed the money or not.”
Memory Tip
RMD = the IRS eventually wants its money. Required withdrawals start at 73.
Why It Matters
Understanding RMDs helps you plan your retirement withdrawals and avoid significant tax penalties. The IRS imposes a 25% penalty on amounts you fail to withdraw, which can seriously damage your retirement savings and financial security.
Common Misconception
Many people believe they can delay RMDs indefinitely if they do not need the money. In reality, the IRS mandates these withdrawals regardless of whether you need the funds, and missing deadlines results in steep penalties on the shortfall amount.
In Practice
If you turn 73 with a traditional IRA balance of $500,000, you must withdraw approximately $18,500 that year based on IRS life expectancy tables. If you only withdraw $10,000, you would face a penalty of 25% on the $8,500 shortfall, resulting in a $2,125 penalty plus owed taxes on the missed distribution.
Etymology
Plain English: the REQUIRED MINIMUM amount you must DISTRIBUTE (withdraw) from retirement accounts.
Common Misspellings
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Related Terms
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See Also
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