Required Minimum Distribution (RMD)

Tax-deferred accounts are a deal, not a gift: you skipped tax on the way in, and the IRS eventually collects. Required minimum distributions are the mechanism, forcing a withdrawal from traditional IRAs, 401(k)s, and similar accounts every year once you reach the qualifying age, whether you need the money or not.

The amount is your prior year-end balance divided by a life expectancy factor from an IRS table. The fraction rises each year, so a portfolio that keeps growing can produce distributions that climb steadily and push you into a higher bracket late in retirement.

The penalty for missing one is severe. The excise tax on the shortfall is 25%, cut to 10% if you correct it promptly, and it applies on top of the ordinary income tax you owed anyway. Custodians will usually calculate the figure for you, but the legal obligation is yours.

Roth IRAs are the notable exception and have no RMDs during the original owner's lifetime — a large part of why Roth conversions during low-income years between retiring and reaching RMD age are such a common planning move. Roth 401(k)s are no longer subject to them either.

Two mechanics worth knowing: with multiple traditional IRAs you calculate the requirement per account but may take the total from any one of them, while 401(k)s must each be satisfied separately. A qualified charitable distribution sent straight from an IRA can also satisfy the requirement without the money ever counting as your income.