A Required Minimum Distribution is the minimum amount the IRS requires an account holder to withdraw annually from most tax-deferred retirement accounts (traditional IRAs, 401(k)s) once they reach a specified age, currently 73 under the SECURE 2.0 Act.
Why It Matters
RMDs are one of the most common, highest-stakes calculation errors in wealth management practice — missing or under-withdrawing an RMD historically carried a 50% excise tax penalty on the shortfall (reduced to 25%, or 10% if corrected promptly, under SECURE 2.0), making RMD tracking a genuine fiduciary and operational responsibility for any advisor serving retirees.
How It Works in Practice
- 1RMD amount = prior year-end account balance ÷ a life-expectancy factor from IRS Uniform Lifetime Table
- 2The first RMD can be delayed until April 1 of the year after the account holder turns the required age, but that creates two taxable distributions in one year if delayed
- 3Roth IRAs are exempt from RMDs during the original owner's lifetime (a rule that changed for Roth 401(k)s under SECURE 2.0 as well)
- 4Inherited retirement accounts have their own, more complex RMD rules under the SECURE Act's 10-year distribution requirement for most non-spouse beneficiaries
Common Pitfalls
Aggregating RMDs across multiple IRAs is permitted (take the total from one account), but 401(k) RMDs generally must be taken separately from each plan — conflating the two rules is a common advisor error
RMD ages and penalty rules have changed twice in recent years (SECURE Act, then SECURE 2.0), so guidance based on older rules can be materially wrong
Failing to plan for RMDs well before they start can push a client into a higher tax bracket or trigger higher Medicare IRMAA premiums the year distributions begin
Related Terms
Latest from Insights
All Insights →- PaymentsUS Checks Moved Over Twice the Money of All Card Payments
Americans wrote 9.2 billion checks in 2024 and made 187.7 billion card payments. The checks moved $24.4 trillion; the…
- Banking & Fintech389 Banks Are Over the 300% CRE Line. 107 Meet the Screen
389 US banks hold CRE loans of 300% or more of capital. Only 107 also meet the screen's other test: CRE growth of 50%…
- Banking & FintechCash Management and Cash Pooling, Explained
Cash management keeps a company able to pay what it owes each day. Here is how it works, from balances and sweeps to…
Sign up for Finantrix Insights for periodic updates of new and notable.
Protected by reCAPTCHA. No spam. Unsubscribe anytime.