What is the purpose of a Required Minimum Distribution (RMD)?

The purpose of a Required Minimum Distribution (RMD) is to ensure that individuals withdraw a portion of their retirement accounts and pay taxes on it. This requirement is set by the IRS to prevent individuals from accumulating retirement savings indefinitely without taking any distributions and thereby avoiding taxation.

Under IRS rules, individuals who reach a certain age (72 as of the latest guidelines) must begin taking distributions from their tax-deferred retirement accounts, such as traditional IRAs and 401(k)s. This ensures that retirement savings are eventually taxed as ordinary income, as contributions to these accounts are often made pre-tax.

By mandating distributions, RMDs also encourage individuals to use their retirement savings for their intended purpose, which is to provide income during retirement rather than as a means of wealth accumulation indefinitely.