Required Minimum Distribution Method

AAA

DEFINITION of 'Required Minimum Distribution Method'

One of three methods by which early retirees of any age can access their retirement funds without penalty before turning 59 ½. Normally, funds withdrawn before age 59 ½ are assessed a 10% early withdrawal penalty. Funds must be withdrawn as substantially equal periodic payments as outlined by Internal Revenue Code Section 72(t) and must continue for five years or until the retiree reaches 59 ½, whichever is longer. If withdrawals are stopped, all funds that have already been withdrawn become subject to early withdrawal penalties.


The annual distribution amount is calculated by dividing the retirement account balance on December 31 of the prior year by the retiree's remaining life expectancy as determined by the IRS's life expectancy table. This means that an increase in the retiree's account balance will lead to larger distributions and a decrease in the retiree's account balance will lead to smaller distributions.

INVESTOPEDIA EXPLAINS 'Required Minimum Distribution Method'

The two other methods for early, penalty-free retirement withdrawals are the fixed annuitization method and the fixed amortization method. The required minimum distribution method is considered to be the simplest. Each method can result in quite different distribution amounts.

RELATED TERMS
  1. Roth IRA

    An individual retirement plan that bears many similarities to ...
  2. Required Minimum Distribution - ...

    The amount that Traditional, SEP and SIMPLE IRA owners and qualified ...
  3. Individual Retirement Account - ...

    An investing tool used by individuals to earn and earmark funds ...
  4. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  5. Internal Revenue Service - IRS

    A United States government agency that is responsible for the ...
  6. Finance

    The science that describes the management, creation and study ...
Related Articles
  1. Retirement

    Borrowing From Your Retirement Plan

    Left with no alternative but to take money out from your retirement savings? Here are some guidelines.
  2. Budgeting

    Managing Income During Retirement

    Learn some sensible strategies for making your hard-earned savings last for as long as you need them.
  3. Taxes

    Tips For Moving Retirement Plan Assets

    Moving assets is common when changing jobs or retiring, but you have to do this carefully to avoid penalties.
  4. Taxes

    An Introduction To Correcting Ineligible IRA Contributions

    Eager to save for retirement? Find out how to avoid overpayment penalties.
  5. Retirement

    What is the difference between a fixed and variable annuity?

    Understand the difference between fixed, variable and indexed annuities, and read a brief summary of their respective risks and advantages.
  6. Professionals

    Just Retired? No Better Time for a Second Career

    After working for decades and reaching retirement age, what's next? A second career, of course. Here's why and how.
  7. Retirement

    How does the Canada Pension Plan (CPP) work, and what asset mix does it hold?

    Learn the difference between a chartered financial analyst and the Canadian pension plan. Explore Canadian retirement options and how the CPP is invested.
  8. Professionals

    When Your Client's Retirement is Around the Corner

    With thousands of Baby Boomers reaching retirement age every day, here's a guide as to how financial advisors should approach and advise them.
  9. Professionals

    A New Wake-up Call for Savers

    Recent findings from an index that measures how many people who are at risk of not being able to maintain their current standard of living in retirement.
  10. Professionals

    Retirement Bliss? Not So fast: When Savings Lag

    Most people aren't saving enough for retirement. Here are some tips savers and financial advisors can use to change that.

You May Also Like

Hot Definitions
  1. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  2. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  3. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  4. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  5. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  6. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
Trading Center