What are Required Minimum Distributions?

RMDs are withdrawals that are mandatory for an individual to take from an IRA or 401(k) after the person has reached 70 ½.

The government created laws that help and encourage people to save for their retirement by deferring taxes on the growth on certain qualified retirement investment accounts. On Traditional IRAs and 401(k) accounts, they are only waiting to get the tax revenue from distributions/withdrawals that are fully taxable as income.

They can only wait so long, because, remember, the contributions to these accounts were made before any taxes were taken out (“pretax”). Some people would prefer not to touch this money for as long as possible since it grows tax-deferred. RMDs (Required Minimum Distributions) are the amounts that a person must withdraw each year from these accounts, beginning on April 1 on the year after the individual has turned 70 ½ years old.

The way it is calculated is based on the age of the person and what’s called a “withdrawal factor” or “withdrawal divisor,” which is simply the number by which you must divide your IRA or 401(k) account balance to arrive at the amount that must be withdrawn. For instance, at age 76 the withdrawal factor is 22, so you would divide your account balance, which let’s say is $100,000, by 22, and arrive at the RMD amount, which is $4,545.

That amount would have to be reported as a distribution at tax-time, or the account holder would be penalized by 50% of the RMD amount. So over $2,250 would go to the IRS in that example if the RMD was not taken when it was supposed to be.

Of course, once you take an RMD, you can pretty much do whatever you want with the money, after the IRS has had a chance to tax it, including reinvesting it somewhere else. Roth IRAs are not taxable in retirement and are not subject to RMDs.

Inherited IRAs, including inherited Roth IRAs, are subject to RMDs, however, except if a spouse wants to treat the IRA as their own, and the spouse is not yet old enough to have to take an RMD, or if the account has been “stretched” in a lifetime annuity product on the life of the beneficiary.

New rules also allow up to $125,000 of a person’s IRA or 401(k) balance to be designated as a QLAC (Qualified Longevity Annuity Contract), and defer the RMDs on that portion of their retirement assets.

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