Required Minimum Distribution (RMD) refers to the minimum amount that eligible individuals must withdraw from their employer-sponsored 401(k) plans annually after reaching a certain age, as mandated by the Internal Revenue Service (IRS) guidelines. The purpose of RMD is to ensure that retirement savings in tax-advantaged accounts, like 401(k)s, are not perpetually deferred, but rather, are gradually distributed during retirement to facilitate tax revenue collection.
Once an individual reaches the age of 72, they are generally required to begin taking RMDs from their employer 401(k) account. The RMD amount is calculated based on the individual's life expectancy and the account balance at the end of the previous year. Failure to withdraw the required amount may result in significant tax penalties.
- Example 1: Sarah turned 72 last year and needs to start taking RMDs from her employer 401(k) plan. Her account balance at the end of the previous year was $500,000, and her life expectancy factor is 25. Based on this, her RMD for the current year would be $20,000 ($500,000 ÷ 25).
- Example 2: John inherited a 401(k) account from his late father. As a non-spouse beneficiary, he must take RMDs based on his own life expectancy, determined by IRS Single Life Expectancy Table. This means John needs to calculate his RMDs differently from a regular account holder.
- Example 3: David, who is still working at age 72, participates in his employer's 401(k) plan. However, he doesn't need to take RMDs from that specific plan until he retires, provided he doesn't own 5% or more of the company. This exception allows him to continue contributing while postponing RMDs until retirement.