Definition
RMDs force retirees to withdraw and pay taxes on tax-deferred retirement accounts (Traditional IRA, 401k). The amount is calculated by dividing the account balance by an IRS life expectancy factor. SECURE 2.0 raised the starting age to 73 (75 starting in 2033). Failure to take RMDs incurs a 25% penalty on the shortfall. Roth IRAs are exempt from RMDs during the owner's lifetime.
functions Formula
RMD = Account Balance (Dec 31 prior year) / Life Expectancy Factor
lightbulb Example
An investor age 73 has a $1M Traditional IRA. IRS factor for age 73 is 26.5. RMD = $1M / 26.5 = $37,736. This amount must be withdrawn and is taxed as ordinary income. At age 80, the factor shrinks to 20.2, increasing the RMD percentage.
verified_user Key Points
- Mandatory annual withdrawals from tax-deferred accounts
- Begins at age 73 (75 starting 2033 per SECURE 2.0)
- 25% penalty on missed RMDs
- Roth IRAs exempt during owner's lifetime