Required Minimum Distributions (RMDs)

Required Minimum Distributions (RMDs) refer to the minimum amount that a retirement plan account owner must withdraw annually from their retirement accounts, such as IRAs (Individual Retirement Accounts) and 401(k)s, once they reach a certain age.

The RMD rules apply to individuals who are aged 72 or older (as of 2020, previously it was 70½), and the amount is calculated based on the account balance and the IRS life expectancy tables. Failing to take the RMD can result in substantial penalties, typically 50% of the amount that should have been withdrawn.

For example, if an individual has an IRA balance of $100,000 at the end of the previous year and is 72 years old, the IRS may require a distribution of approximately $3,650 for that year (this amount may vary based on the IRS life expectancy divisor).