To limit the otherwise-generous benefits of tax deferral for traditional retirement accounts, the Internal Revenue Code requires retirement account owners to begin taking money out of their accounts upon reaching age 70 ½. Not that retirees are required to actually spend the money. But the funds must be distributed out of the retirement account, triggering income tax consequences, to ensure that Uncle Sam can get his share.
However, the purpose of the RMD rules is simply to ensure that retirement accounts taxation is not deferred any longer than what a reasonable retiree would prudently have withdrawn anyway. As a result, the RMD obligation merely requires that the account owner take money out systematically over his/her life expectancy (or actually, the joint life expectancy of the retiree and his/her designated beneficiary).
To limit potential abuse, though, the Internal Revenue Code and supporting Treasury Regulations prescribe very specific rules about exactly how to calculate what a “prudent” distribution would have been, including when and how to determine the value of the account, what life expectancy to use, the deadline for taking the distribution, and how to coordinate when there are multiple accounts with multiple distribution obligations.
In reality, retirees who are actually using their retirement accounts for retirement spending may well be withdrawing more than enough to satisfy their RMD obligations anyway. However, given the substantial penalties involved for failing to take the full amount of an RMD – a 50% excise tax for any RMD shortfall – it is crucial to ensure that the RMD is calculated correctly (and withdrawn in a timely manner)!
source https://www.kitces.com/blog/required-minimum-distribution-rmd-calculation-tax-rules-ira-401k-403b/?utm_source=rss&utm_medium=rss&utm_campaign=required-minimum-distribution-rmd-calculation-tax-rules-ira-401k-403b
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