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What is an “RMD”? “RMD” stands for Required-Minimum Distribution. A “distribution” is money that you intentionally take out of your retirement account.1 A “required minimum distribution,” then, a minimal amount you must withdraw. For some people, this is no big deal, because they’re already living off their retirement money. However, other people might prefer to leave their retirement account alone indefinitely. And the RMD prevents them from doing so. Why is there an RMD? Why can’t you just leave your retirement money untouched? Well… retirement accounts are often given various tax advantages – such as tax-deferred growth. From the official point of view of the U.S. government, these benefits are intended for a single purpose: to help you accumulate money to live on in retirement. So, the basic rationale of the RMD is this: Once you’re in retirement, you must start settling up your tax bill. Who Has to Take an RMD? Since the tax advantages are supposed to assist people in retirement preparation, you can only postpone your tax bill until you’re in retirement. The RMD is a guarantee that once you’re retired, you’ll be on the hook for at least some of those taxes you’ve been deferring. “Retirement” can mean different things to different people. For consistency, the IRS2 has defined it in terms of a person’s attained age, rather than in terms of whether they’re “working” or not. When Do You Have to Take the RMD? For most purposes, the IRS considers a person to be “at retirement age” once he or she hits 59 ½. But! This doesn’t mean that you have to start withdrawing money right away. At 59 ½ you may begin taking penalty-free distributions from your retirement accounts – but you don’t have to. But the IRS won’t wait on you forever. At a certain point, the IRS will start force-feeding you your retirement money – whether you want to touch it or not. This point, called the RMD age, is currently 72. Congress changed this crucial number in the 2019 “SECURE” Act.3 Prior to this law, the RMD age was 70 ½.4 Where Would Your Money Be Susceptible to an RMD? What accounts does this apply to? First and foremost, we’re talking about retirement vehicles that are funded with pre-tax dollars. Prominent examples of this are Traditional IRAs,5 as well as employer-sponsored, defined-contribution plans, such as the 401(k), the 403(b), and the 457(b). But… Roth 401(k)s are funded with post-tax dollars, and they have RMDs, too. The notable exception to the minimum-distribution requirement is the Roth IRA. When in doubt, consult your employee-benefit administrator, human-resource department, or financial adviser for detail. Because, you don’t want to make a mistake, here! What Happens If You Don’t Take Your RMD? The IRS imposes a hefty, 50% penalty on money that you were supposed to take but didn’t take. And this penalty, sometimes referred to as a 50% “excise tax,” is in addition to the income tax that was owed on the RMD. How Much Do You Withdraw? Major caveat time! You’re responsible for the numbers! The government does have worksheets available at IRS.gov. And you should definitely use these, and consult with your tax preparer, if you have portfolio-specific questions. That said… we can make a few points – for general informational or entertainment purposes, only. Number one, your RMD amount is the answer to a division problem. The dividend6 is the amount of money you have in relevant retirement accounts. You get these numbers from your custodial or other financial institutions. In the case of an IRA, they’ll send you an “informational” Form 5498.7 This document contains several key pieces of information, including the Fair-Market Value, or FMV, of your IRA – as of December 31 the previous year. The FMV is divided by something called your “life-expectancy factor.” Also known as the “RMD divisor,” this is supplied by the IRS in widely published tables. Warning! The IRS is reportedly in the process of revising its tables. Suppose John is 72 and has a single IRA valued at $1,000,000. For the time being, John’s divisor at 72 is “25.6.” Therefore, John’s RMD is $1,000,000 / 25.6, or $39,062.50. How Do You Take the RMD? To take the RMD, you’ll fill out a distribution form from what whatever institution holds your retirement account. At tax time, you’ll receive an IRS Form 1099-R, reporting the distribution amount. You’ll bring this to your tax preparer. In my example, the RMD amount reported on John’s 1099-R will be treated as income for the relevant year, and John will be taxed at whatever his income-tax rate is. If John fails to take his RMD, he’ll forfeit half of the RMD value. That’s $19,531.25 in my example! And, remember, he still owes income tax on the full $39,062.50. Conclusion An “RMD” is the minimum amount that the IRS requires you to withdraw from many retirement accounts, once you hit 72 – or, under previous rules, the age of 70 ½. There are many complications that I haven’t gotten into, here. For example, there are rules that govern circumstances such as: where you own more than one retirement account where you are still employed at RMD age where your retirement account has been funded with post-tax dollars, but still has to meet minimum-distribution requirements and so on But if you found something of interest or of use in the brief overview, I ask that you like the video. I also invite you to subscribe to the channel if you’d like to see more content along these lines. If you click the notification bell, you’ll be alerted to new content as it becomes available. Either way, I thank you so much for joining me today. And I look forward to seeing you again in another video. Thank you so much! (Featured-image credit: https://www.pexels.com/photo/question-mark-illustration-356079/https://images.pexels.com/photos/356079/pexels-photo-356079.jpeg.) Notes: 1 As opposed to, say, money that is lost due to bad investment experience. 2 Internal Revenue Service. 3 Setting Every Community Up for Retirement Enhancement Act. 4 The new rules basically apply to anyone born after June 30, 1949. 5 Individual Retirement Accounts / Annuities. 6 That is, the number that gets divided. 7 This is usually mailed in the first or second quarter of the year.