What is a Required Minimum Distribution and why is it important?

RMDs are minimum amount of money that must be taken out of certain retirement accounts every year.

Our brokerage platform Altruist shares why RMDs are important:

Do you want to pay a 50% penalty on your retirement savings? Probably not. This article is about Required Minimum Distributions -- if you're approaching (or in) retirement, this one's for you.

Your Required Minimum Distribution is the minimum amount you must withdraw from your retirement account each year. According to the IRS, you have to start taking withdrawals from your Traditional IRA, SEP IRA, SIMPLE IRA, 401(k), 403(b), 457(b), or other retirement plan accounts when you turn 72 years old. Although, if you turned 70 ½ before January 1, you have to start taking withdrawals at 70 ½.

To clarify, if you're watching this video and are below 70 years old, you don't need to worry about being forced to take distributions from your retirement accounts until you're 72. Keep in mind that Roth IRAs don’t require withdrawals until after the death of the account owner.

Why does the IRS require these withdrawals?

The IRS requires you to take out this money to protect against people using a retirement account to avoid paying taxes. These distributions from your retirement account are taxed at your current income tax rate based on the amount you withdraw. But if you fail to withdraw the RMD by the applicable deadline, the amount not withdrawn is subject to a 50% penalty!

How is the minimum distribution amount calculated? 

To figure out the RMD for any year, you take your retirement account's balance as of December 31 of the previous year and divide that by a distribution period from the IRS’s “Uniform Lifetime Table.” 

These rules can be pretty confusing, so here’s an example—if you’re 72 and have a retirement account balance of $450,000, the uniform lifetime table currently lists a distribution period of 25.6 years. Therefore, your RMD amount for the upcoming year would be $17,578. This is the minimum amount of money you must take out of your retirement account this year.

If you have multiple retirement accounts subject to RMDs, you’ll need to do this calculation for each account separately. This same rule applies if you have multiple 401(k)s or 457(b)s, you must pull an RMD from each account separately. However, if you have more than one 403(b) plan or more than one IRA, the IRS allows you to take your total RMD from just one of them.