RMD

RMD is an acronym used in several fields, but it is most commonly associated with Required Minimum Distribution in the context of U.S. retirement accounts. The term describes mandated withdrawals from certain tax-advantaged accounts that must occur each year after reaching a specified age.

In finance, aRequired Minimum Distribution applies to traditional IRAs, 401(k)s, 403(b)s, and most other qualified plans. Roth IRAs are generally not subject to RMDs for the original account owner, though inherited accounts may be required to take RMDs. The purpose of RMDs is to convert tax-deferred retirement savings into taxable income over the holder’s lifetime.

When to begin and how it is calculated vary by law. The required beginning date was raised to age 73 by the SECURE Act 2.0 for people who reach that age in 2023 or later, with the age set to rise to 75 in 2033 for future cohorts. The first RMD is typically due by April 1 of the year following the year in which you reach the required age; subsequent RMDs are due by December 31 each year. RMD amounts are calculated using the prior-year end balance and a life expectancy factor from IRS tables (generally the Uniform Lifetime Table). Special rules may apply for certain beneficiaries, including spouses who are sole beneficiaries.

Penalties for failing to take an RMD are severe: a 50 percent excise tax on the shortfall. In most cases, RMDs are included in ordinary income for the year they are withdrawn. Inherited or beneficiary RMD rules differ and depend on the beneficiary’s relationship and life expectancy.

Other uses of the RMD acronym exist in different fields, but the above describes the principal financial meaning.