Required Minimum Distribution (RMD)
Tax Glossary Term
Definition
A Required Minimum Distribution is the minimum amount you must withdraw from certain tax-deferred retirement accounts each year once you reach a specific age. Under the SECURE 2.0 Act, the RMD starting age is 73 for people born between 1951 and 1959, and 75 for those born in 1960 or later. RMDs apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and most other employer-sponsored retirement plans. Roth IRAs are exempt from RMDs during the owner's lifetime, making them a powerful tool for estate planning. The annual RMD amount is calculated by dividing your account balance as of December 31 of the prior year by a life expectancy factor from the IRS Uniform Lifetime Table (or the Joint and Last Survivor Table if your sole beneficiary is a spouse more than 10 years younger). For example, a 75-year-old uses a factor of 24.6 from the Uniform Table. As you age, the factor decreases, meaning RMDs grow as a percentage of your account. You must take your first RMD by April 1 of the year after you turn the applicable age, but delaying the first RMD means taking two distributions in one year (the delayed first and the current year's), which could push you into a higher bracket. Failure to take a full RMD results in a 25% excise tax on the shortfall (reduced to 10% if corrected within two years). RMD income is taxed as ordinary income and counts toward your AGI and MAGI, potentially triggering Medicare premium surcharges and phase-outs of other benefits.
Example
Traditional IRA balance (Dec 31 prior year): $500,000
Age: 75, Uniform Lifetime Table factor: 24.6
RMD: $500,000 / 24.6 = $20,325
Taxed as ordinary income in the year withdrawn