Required Minimum Distribution (RMD)
Definition
The minimum amount you must withdraw yearly from retirement accounts (traditional IRAs, 401k) after age 73. Calculated based on age and account balance. Failure to withdraw incurs a 25% penalty on the shortfall.
Why It Matters
RMDs force you to withdraw and pay taxes on retirement savings even if you don't need the money. Planning is crucial. Roth IRAs have no RMDs, making them valuable for leaving legacy wealth.
Example
Age 75, have $1M traditional IRA. RMD tables require withdrawal of ~5% equals $50,000. You must withdraw and pay income tax. Roth IRA: no RMD. You can leave $2M to heirs tax-free.