Defining the Required Minimum Distribution

Definition

A required minimum distribution refers to the amount one is required to withdraw from their retirement accounts in a given year. When money was placed into the retirement account, the owner received a tax deduction for the contribution. The IRS wants to make sure that the owner of a retirement account doesn’t wait too long to pay taxes, so they require the owner to start pulling money out at a certain age. The required age is usually the year in which they turn 70.5, however there are some exceptions discussed in further education articles.

History of the RMD

The required minimum distribution was established when legislation was passed in 1974. The Employee Retirement Income Security Act of 1974 (ERISA) created rules for the federal income tax effects from employee benefit plans. Since 1974, there have been two amendments to the minimum distribution rules. In 1982, the Tax Equity and Fiscal Responsibility Act (TEFRA) amended “minimum distribution rules to require distributions must begin for key employees no later than the taxable year in which such employee turns 70 & ½ and must begin for all other employees the later of the taxable year in which the employee turns 70 & ½ or retires” (Georgetown Law 4). In 1986, the Tax Reform Act (TRA 86) “modified the minimum distribution rules to require that all participants must begin the required minimum distributions by the April 1of the year following the year in which the individual reaches age 70 & ½, regardless of whether the individual has actually retired” (Georgetown Law 5). 

Accounts Subject to an RMD

Generally, accounts which are funded with pre-tax money are subject to an RMD. Some examples of accounts that retirees must take RMDs from are an IRA, SEP IRA, SIMPLE IRA, 401(k), 403(b), 457(b), profit sharing plans, and other defined contribution plans. After-Tax, Roth 401(k)s are also subject to RMDs.  There are ways to plan for RMDs that we will discuss in further articles. 

Source Used:
Georgetown Law. “Workplace Flexibility” 2010. PDF File.