Bob French, CFA

What is an RMD?

We get a lot of questions about retirement planning. While the answers often depend on a person’s specific situation and planning goals, plenty of the basic level information can be applied broadly. 

With that in mind, here are the answers to some of the most commonly asked questions about required minimum distributions (commonly referred to as RMDs or MRDs).

What is an RMD?

RMD stands for Required Minimum Distribution. Lately, people have been calling them MRDs (Minimum Required Distributions). Both acronyms refer to the same thing. In the year you turn 70½, you are required to start withdrawing money from most of your tax-advantaged investment accounts, whether you need the money or not.

What accounts do you need to take RMDs from?

RMDs are required in traditional IRAs, 401ks, and employer-sponsored retirement plans, including profit sharing plans.

How much do you need to take out?

That depends on the account. If the beneficiary is your spouse (and your spouse is within 10 years of your age), divide the amount of money in the account as of December 31 of last year by your remaining life expectancy as defined by the IRS. Assuming you don’t fall into any of the categories listed above, this will be your RMD amount for the current year.

If the beneficiary is not your spouse, your spouse is 10 years younger than you, or the account is an inherited IRA, your RMD is calculated differently.

Are RMDs taxed?

For tax purposes, RMDs are treated as normal distributions from the account.

What if I don’t withdraw the minimum?

You will pay a penalty. Specifically, the difference between the distribution you take and the RMD will be taxed at 50 percent. If the RMD is $10,000, and you take out $5,000, the IRS will assess a penalty of $2,500 – half the difference.

What can you do with the distributions?

Pretty much whatever you want. If you don’t need it for living expenses, you might consider reinvesting the money in a taxable investment account or making a charitable donation.

Calculating RMDs can be complex, and you want to be sure you are calculating the amount correctly. It’s important to speak with a financial professional to get solid RMD amounts and avoid unnecessary penalties.

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