## What is a 'Required Minimum Distribution - RMD'

A required minimum distribution (RMD) is the amount that traditional, SEP or SIMPLE IRA owners and qualified plan participants must begin distributing from their retirement accounts by April 1 following the year they reach age 70.5. RMD amounts must then be distributed each subsequent year based on the current RMD distribution calculation amounts.

Next Up

## BREAKING DOWN 'Required Minimum Distribution - RMD'

These required minimum distributions are determined by dividing the prior year-end fair market value of the retirement account by the applicable distribution period or life expectancy. Some qualified plans allow certain participants to defer beginning their RMDs until they retire, even if they are older than age 70.5. Qualified plan participants should check with their employers to determine whether they are eligible for this deferral. Also, Roth IRAs do not require withdrawals until after the death of the owner.

## Calculation Example

It should be noted an investor is allowed to withdraw at least the required minimum distribution but may withdraw any amount above that number. If an investor wants to withdraw 100% of his account in the first year, he is legally allowed to make that withdrawal. When calculating a required minimum distribution for any given year, it is always wise to confirm on the website for the Internal Revenue Services (IRS) that you are using the latest calculation worksheets. Different situations call for different calculation tables. For example, IRA account holders whose spouse is the only beneficiary of the account and is more than 10 years younger than the account holder use one table, while IRA account holders whose spouse is the only beneficiary of the account and the same age as the account holder use a different table.

The RMD calculation involves three simple steps. First, write down the balance of the IRA account on Dec. 31 of the previous year. Second, find the distribution factor listed on the IRA calculation tables that corresponds to your age on your birthday of the current year. For most people, this factor number ranges from 27.4 all the way down to 1.9. As a person gets older, the factor number goes down. The third step is to divide the account balance by the factor number to find the RMD.

For example, say it is May 15 and the account holder is 74 years old and his birthday is on Oct. 1. His IRA is worth \$225,000 and had a balance of \$205,000 on Dec. 31 of the previous year. The distribution factors from his relevant IRS table are 23.8 for age 74 and 22.9 for age 75.

The RMD is calculated as:

RMD = \$205,000 / 22.9 = \$8,951.97

## A Special Case: Inherited IRAs

Generally, with an Inherited IRA, an account holder must take annual distributions regardless of his age. Failure to take the distribution results in a 50% IRS penalty tax on the RMD.

RELATED TERMS
1. ### IRS Publication 590-B: Distributions ...

IRS Publication-B outlines the rules for making distributions ...
2. ### Qualified Distribution

Distributions made from a Roth IRA that are tax and penalty free. ...
3. ### Roth IRA

A Roth IRA is an individual retirement plan that bears many similarities ...
4. ### IRA Rollover

A transfer of funds from a retirement account into a Traditional ...
5. ### Roth IRA Conversion

A reportable movement of assets from a Traditional, SEP or SIMPLE ...
6. ### IRA Asset Will

A document that specifies how the assets in an individual retirement ...
Related Articles

2. Retirement

### 6 Important Retirement Plan RMD Rules

Paying taxes is inevitable - that's why you need to learn about the rules for required minimum distributions.

### Best Ways to Avoid RMD Tax Hits on IRAs

If you want to avoid hefty tax penalties, read this cheat sheet on IRA required minimum distributions.
4. Retirement

### RMDs: How to Calculate and Make the Most of Them

When you reach age 70.5 you will have to take required minimum distributions from qualified plans.

### Strategic Ways To Distribute Your RMD

We give you some tips on preserving your nest egg in the face of unavoidable withdrawals.
6. Retirement

### Preparing For Retirement Plan RMD Season

Paying taxes is inevitable - that's why you need to learn about the rules for required minimum distributions.
7. Retirement

### Avoiding Mistakes In Required Minimum Distributions (RMD)

If you don't calculate your required minimum distributions accurately, you might have to pay an excise tax.
Hot Definitions
1. ### Net Profit Margin

Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
2. ### Gross Margin

A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
3. ### Current Ratio

The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
4. ### SEC Form 13F

A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
5. ### Quantitative Easing

An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
6. ### Risk Averse

A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...