Understanding Required Minimum Distributions

The idea behind Required Minimum Distributions, or RMDs, is that the government wants to give us a tax incentive to save for retirement, but they also want to make sure we don’t misuse it. For example, if we’re in the 24% tax bracket and we put money into a tax-deductible IRA or a 401(k), each dollar we put in only costs us 76 cents because it’s a before-tax contribution. So, the government is helping us save, but the government also really wants this to be retirement money. In other words, they don’t want it to be money that you never spend or leave for your heirs. Most importantly they want to make sure you pay tax on it eventually.