Retirement accounts, such as traditional IRAs and employer-sponsored plans like a 401(k), are powerful tools for building wealth over a lifetime. However, the IRS still wants its share of these funds.
When you contribute to a retirement account tax-free, you must pay taxes on withdrawals in retirement. This is known as a required minimum distribution (RMD). Despite this, deferring taxes to retirement can be beneficial, allowing you to save more and take advantage of compound interest.
For most individuals, their marginal tax rate in retirement is lower than what they would have paid while working. However, there’s an exception for those who don’t need to withdraw funds from their accounts during a given year: the IRS mandates a certain amount must be withdrawn each year after age 73. This RMD ensures the government gets its cut.
To calculate your RMD, you’ll divide your account balance at the end of the previous year by the distribution period set by the IRS based on your age. For example, if you have $500,000 in your account at the end of 2023 and are 80 years old, your RMD would be approximately $24,752.48.
Source: https://www.fool.com/retirement/2024/12/21/how-much-is-the-required-minimum-distribution-rmd