Certified Plan Sponsor Professional (CPSP) Practice Exam

What does RMD stand for in the context of 401(k) plans?

1. Retirement Minimum Deductions

2. Required Minimum Distributions

3. Retirement Minimum Distributions

4. Required Minimum Deductions

The correct answer is: Required Minimum Distributions

In the context of 401(k) plans, RMD stands for Required Minimum Distributions. This term refers to the minimum amount that must be withdrawn from a retirement account, such as a 401(k), beginning at a certain age, typically 72 years old for most individuals. These distributions are mandated by federal regulations to ensure that individuals do not defer taxes indefinitely on their retirement savings. The requirement is designed to ensure that retirement funds are eventually taxed, as contributions to these plans are often made pre-tax. By imposing a distribution requirement, the IRS collects taxes on the money that has been growing tax-deferred for years. Failing to take the required minimum distribution can result in hefty penalties, underscoring the importance of understanding RMDs for effective retirement planning. Understanding this concept is essential for plan sponsors and participants alike to properly manage retirement accounts and comply with IRS regulations.