A Required Minimum Distribution (RMD) is an amount that the account owner must take from their pre-tax retirement accounts: Traditional IRA, 401(k)/403(b), and 457. The percentage of the account that must be taken out each year goes up over time (see the IRA Required Minimum Distribution Worksheet). If someone fails to take out their RMD, they face a 50% penalty of the amount they were supposed to take out.
The SECURE Act changed a couple things regarding RMDs:
1. owners can now wait until age 72 to take RMDs instead of age 70.5
2. non-spouse beneficiaries of pre-tax retirement accounts can no longer take beneficiary RMDs over their lifetime; they must take the entire account out within 10 years
Real-life Application: Person A turns 76 this year and the balance of their Traditional IRA at the end of last year was $100,000. The amount they must take out sometime this year (before the year ends) is $4,545.45 ($100,000 / 22.0). If they don’t take it out, they face a penalty of $2,272.73 ($4,545.45 / 2).