In simple terms, an RMD is when you reach a certain age and Uncle Sam requires you to withdraw a certain amount of money from your retirement accounts. Many remember the old 70 1/2 age as the trigger, but that has been pushed up to 72 now. Once you hit that magic age the custodian holding your IRA/401k will send you a letter to remind you to take your RMD (and generally the amount). However, it is your responsibility to request it, and if you forget the tax penalty can be significant. (You can request a first time abatement of the penalty with the IRS however)
How is the RMD calculated?
You take the prior year’s ending account value and divide it by your life expectancy found in the tables that the IRS publishes. This is your RMD amount for the year. Obviously the RMD amount gets larger each year as you get older.
How is the RMD taxed?
It is taxed just like any IRA withdrawal, as ordinary income on your tax return. (Don’t confuse with Social Security where only a portion of your SS is considered ordinary income). If you are in retiree friendly state like GA, up to $65,000 in retirement income (RMD’s, SS, Etc) is excluded from state income tax.
