Required Minimum Distribution (RMD) Definition
Define RMD In Simple Terms
A required minimum distribution, or RMD, is the minimum amount of money that must be withdrawn from a traditional IRA, SIMPLE IRA, or SEP by owners and participants of retirement age in order to avoid tax consequences. As of 2020 the age at which an account holder must start minimum withdrawals is 72, although some qualified plans allow account holders to defer making withdrawals until after they actually retire.
How to Calculate RMD
To calculate the RMD for a retirement account, follow these steps:
- Take the account balance as of December 31st of the previous year
- The IRS has a set of worksheets containing calculation tables that correspond to different scenarios and account holder ages. Find the one that corresponds to your situation and date of birth to find your distribution factor. This number typically ranges from 27.4 to as low as 1.9
- Divide the account balance by the distribution number to get the RMD
Example of RMD
For example, say a retiree has an account balance of $200,000 and a distribution factor of 20. This means their RMD is $200,000 / 20, or $10,000. Each year after age 72, this account holder must withdraw at least $10,000 from their account, although they may withdraw more if they wish.