Required minimum distribution
What is required minimum distribution?
Required minimum distribution (RMD) is the minimum amount people must withdraw from their retirement account each year. Generally, people must begin taking withdrawals from their individual retirement accounts (IRA), employer sponsored IRAs (SEP IRA), savings incentive match plans for employees (SIMPLE IRA), salary reduction simplified employee pension plans (SARSEP) or retirement plans when they reach 70.5 years old.
Roth IRAs don’t require withdrawals until after the person has died.
Withdrawals from these accounts, except amounts that were previously taxed or that qualify as tax free, are treated as taxable income.
If the owner of the account dies before the required minimum distribution has started, the beneficiary of the account is subject to different RMD rules.
Usually the entire account must be distributed to the beneficiary within five years of the owner’s death, or the beneficiary must begin taking regular withdrawals from the account immediately upon the owner’s death, if the beneficiary plans to receive withdrawals throughout his or her lifetime.
When calculating the minimum distribution amount, it’s advisable to consult the IRS website. The calculation tables used to determine the RMD vary based on individual circumstances.
Required minimum distribution example
Hank is about to turn 70.5 years old. He has a SEP IRA and a Roth IRA. Hank must begin making regular minimum withdrawals from his SEP IRA. He is not required to take any withdrawals from his Roth IRA during his lifetime. Hank will be required to pay taxes on any income that has not already been taxed.
Chris has a 401(k) retirement plan. Chris dies at 60 years old, and his estate is transferred to his wife, Jill. Jill immediately must begin taking regular deductions from Chris’s retirement account that can be spread over her lifetime, or she must withdraw the entire amount of Chris’s retirement account within five years. Jill will be required to pay taxes on any income that hasn’t already been taxed.
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