What is a Required Minimum Distribution?
A Required Minimum Distribution (RMD) is the minimum amount that individuals with certain retirement accounts, such as traditional IRAs (Individual Retirement Accounts) and employer-sponsored retirement plans like 401(k)s, must withdraw from their accounts each year once they reach a certain age. The purpose of the RMD is to ensure that individuals do not indefinitely defer paying taxes on their retirement savings.
The specific age at which RMDs must begin depends on the type of retirement account. For traditional IRAs and most employer-sponsored retirement plans, including 401(k)s, individuals are generally required to start taking RMDs by April 1st of the year following the year in which they turn 72 (as of the year 2021). However, if an individual continues working beyond that age and is still participating in an employer-sponsored retirement plan, they may be able to delay taking RMDs until they retire.
The amount of the RMD is determined based on the account balance and the individual’s life expectancy. The IRS provides tables to calculate the RMD amount, considering the account balance and the individual’s age. Failure to withdraw the required minimum distribution can result in significant penalties, including a 50% excise tax on the amount that should have been withdrawn.
It’s important to note that Roth IRAs are not subject to RMDs during the account owner’s lifetime. However, beneficiaries of Roth IRAs may be required to take RMDs after inheriting the account.
It’s advisable to consult with a financial advisor or tax professional to understand the specific RMD rules and requirements applicable to your retirement accounts and ensure compliance with the IRS regulations. Gregorek & Associates can help. Call our office today at 425-284-3450 or fill out our contact form and we will be in touch to schedule a meeting.