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What is a Required Minimum Distribution (RMD)?
What is a Required Minimum Distribution (RMD)?

This is a brief explanation of RMDs.

Nancy Gates avatar
Written by Nancy Gates
Updated over a week ago

RMDs are quite the kicker. Remember all those tax deductions you've taken over your careers when contributing to traditional 401(k)s and IRAs?

Uncle Sam does. And Uncle Sam wants his cut.

When using traditional retirement accounts, you get a tax break when you put in money and that money grows tax-deferred (you don't encounter a taxable event when you sell an appreciated asset within such a tax-advantaged account). However, you pay taxes on the money you withdraw from the account and it is taxed as ordinary income.

RMDs (Required Minimum Distributions) are the government's way of getting paid after all this time of you saving and investing. By setting a minimum amount that you have to withdraw, you are forced to at least withdraw and pay taxes on that amount.

Depending on your birth date, the RMD age is as follows.

If you are born:

  • Before 1/1/1951, your RMDs have already started and nothing changes

  • Between 1/1/1951 and 12/31/1959, then your RMDs must start at age 73

  • After 1/1/1960, then your RMDs will begin at age 75

What if you don't want to withdraw the RMD? I've got bad news for you: penalties. There is a current 25% penalty, which is one of the heaviest penalties in the entire tax code. The penalty drops down to 10% if you take the necessary RMD by the end of the second year following the year it was due.

Typically, you'd want to plan ahead and reduce your income in those years to avoid the higher tax brackets you may be subject to (caused by the RMDs). There are several tactics available, mostly centered on withdrawing money prior to your RMD start date in order to "spread out" the tax burden you'll encounter.

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