Required Minimum Distribution (RMD) Definition

A required minimum distribution, or RMD, is the minimum amount of money that must be withdrawn from a traditional IRA, SIMPLE IRA, or SEP by owners and participants of retirement age in order to avoid tax consequences.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:

  1. Take the account balance as of December 31st of the previous year
  2. 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
  3. 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.

Strategies for Minimizing or Eliminating RMDs

As the RMDs from your account increase, they can run up quite a tax bill because they are treated as ordinary income by the IRS for tax purposes.  You can adopt strategies to minimize or eliminate RMDs completely and thereby reduce your tax liabilities. Three such strategies are outlined below. 1. Transfer Funds to a Roth IRA Account: You can transfer remaining funds from your existing retirement account to a Roth IRA account, which does not tax distributions because investments into the account are made with after-tax income.  The caveat to this transfer is that the Roth IRA account must have been open for five years or more and you must bear the expenses for a Roth conversion. It is always a good idea to consult a lawyer or tax attorney before adopting this strategy. 2. Keeping Yourself Employed After 72: Individuals who are still working after the age of 72 and do not own more than 5% of a company are not required to take RMDs. The caveat to this rule is that you are still on the hook for 401(k) account distributions from a previous employer if you have kept them in a separate account. 3. Making QCD Donations: Qualified Charitable Donations (QCD), which reduce the overall income for account holders, was instituted in 2015.  Under this rule, your contributions to a qualified charity, one that is vetted and defined as such by the IRS, can be deducted from your overall income. Such donations can move you from a higher tax bracket into a lower rung and reduce your overall tax liabilities.

RMD stands for required minimum distribution.
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.
To calculate the RMD for a retirement account, first 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 1.93. Divide the account balance by the distribution number to get the 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.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.