What Are Required Minimum Distributions?

You might have heard the acronym “RMD” and you weren’t quite sure what that meant.  You think it has something to do with your investments, but something you have to do down the road when you were older.  You’re right on both accounts.  RMD stands for “Required Minimum Distributions.”  This is the amount of money the government “requires” you to take out of your retirement investment accounts (ex. 401k or IRA) at a certain age.

Why do they require you to do it?  Because they want the tax revenue.  Let’s face it, some people don’t necessarily need to take money out of their investment accounts.  They live well on a pension and Social Security.  They would rather give the IRA money to the kids.  So in order to get the tax money, the government requires you to start taking money out of those accounts at certain ages.  The starting age varies by your birthday, so you want to make sure you know when those distributions must begin.  Also, the % you are required to withdraw goes up as you get older.  This forces more and more money out, again, so more and more tax revenue can be taken.  And the consequences are heavy if you don’t take it out.

But luckily, it’s not as bad as it used to be.  Starting in 2023, the penalty for failing to take an RMD was reduced from 50% to 25% of the amount NOT distributed.  And if you have a large retirement account, that penalty can be a large amount of money, so it’s important to stay on top of it and make sure that distribution is taken.  Lastly, don’t wait until the end of the year.  You can take the distribution at any time.  If you wait too long, sometimes, delays or miscommunications with a financial institution can cause you to miss your window.  Plan ahead and allow plenty of time for those distributions to be completed.