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Narrator: A required minimum distribution, or RMD, is the minimum amount you're required to withdraw annually from tax-deferred accounts once you reach a certain age.
On-screen text: IRA; Tax Deferred.
Narrator: Here's how it works. Tax-deferred accounts, like traditional IRAs, SEP-IRAs, SIMPLE IRAs, or 401(k)s, allow you to contribute money pretax—a significant benefit for some investors. The longer you wait to withdraw money, the longer it can grow without being taxed. But you can't avoid paying taxes on that money forever. At a certain point, the IRS requires you to start taking an RMD, which is usually taxed on withdrawal.
You typically must take the first RMD by April 1 of the year after you reach RMD age. A 2022 change to the law means that you must start taking an annual withdrawal when you turn 73. However, if you were 70 and a half prior to January 1, 2020, you should already be taking annual withdrawals. If you turned 72 before January 1, 2023, you need to begin RMD's no later than age 72 and cannot wait until 73.
Each year, you're required to take an RMD by December 31. Your RMD is calculated based on a variety of factors, including age and account balance. Beneficiaries may also impact your RMD. Because of these factors, your RMD may vary from year to year and from account to account.
Taking an RMD is not something you want to forget. If you miss your RMD, the IRS requires you to pay up to a 25% penalty on the amount that should've been taken. So, for example, if your RMD was $5,000 and you didn't take it by the deadline, you might owe the IRS a penalty of up to $1,250. To prevent this penalty, create a reminder or set up recurring distributions on your account. A little planning to make sure you take your RMD can save you a big headache.
On-screen text: Disclosure: Qualified charitable distributions may satisfy all or part the amount of your required minimum distribution from your IRA.
Narrator: You have a couple distribution choices, like simply withdrawing the money or transferring it to a linked taxable account. The distribution will likely be taxed either way, but transferring it allows you to keep what's left invested.
If you have more questions about RMDs, visit Schwab's RMD center on schwab.com.
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