FAQ: What is a Required Minimum Distribution (RMD) and Does it Apply to Me?
A Required Minimum Distribution (RMD) is an IRS rule that requires owners of pre-tax retirement accounts (Traditional IRA, 401k, SIMPLE IRA, SEP IRA) to begin taking an annual minimum distribution by April 1st of the year following the year they turn 70 ½.
Essentially, the IRS allowed you to make contributions to your retirement accounts pre-tax. Then all of that money grew tax deferred with the goal of saving for your later years
(retirement), and by 70 ½, they want you to begin taking the funds so they can tax them. Your 401k and IRA are tax-deferred accounts, not tax-free accounts.
The amount you are required to take depends on your balance at the close of business on December 31st of the previous year. Your first year of RMD’s, that balance is multiplied by 3.65%, which will give you the number you are required to distribute in that year. This percentage is based on your life expectancy and as you age, your life expectancy decreases, creating a higher percentage. If your account balance grows or remains the same, your RMD will grow as you age.
The only retirement account that does not require distributions after 70 ½ is a Roth IRA. Since a Roth is considered post tax money, the government does not care when you take it.