Tax-deferred retirement accounts do not allow money to stay invested indefinitely. At a defined age, minimum distributions begin, and the required amount is recalculated annually rather than fixed.
Deferral was always time-limited
Contributions to a tax-deferred account reduce taxable income in the year they are made, and the account grows without annual tax on gains.
The tax is not forgiven, only postponed until the money comes out. Required distributions exist so the postponement does not extend indefinitely across a lifetime.
Accounts funded with money already taxed operate under different rules, which is why not every retirement account carries the same requirement.
The calculation has two moving inputs
The required amount is derived from the account balance at a prior year-end divided by a life expectancy factor from published tables.
Both inputs change annually. The balance moves with markets and prior withdrawals, and the factor declines as the account holder ages, raising the required fraction.
Because the factor falls while the balance may rise, the required dollar amount can increase substantially even in years with no unusual market movement.
Multiple accounts complicate the arithmetic
The requirement is calculated per account, but the rules on where the withdrawal may actually be taken from differ depending on the account type.
Some categories permit aggregating the required amounts and taking the total from one account; others require a separate withdrawal from each.
Getting this wrong is one of the more common errors in the area, and the consequences of an under-distribution are set out in regulation rather than left to the custodian.
Custodians calculate but do not decide
Most institutions will compute the required amount for accounts they hold and often offer automatic distribution on a schedule the account holder chooses.
What a custodian cannot see is other accounts held elsewhere, so its figure is complete only for the accounts in front of it.
Responsibility for the total sits with the account holder, which is why households with accounts at several institutions usually track this outside any one provider's statements.
The distribution has cash flow consequences
A required withdrawal is a taxable event for tax-deferred accounts, and it arrives whether or not the household needs the money that year.
Distributions can be taken as cash or, at some custodians, as securities moved in kind, which satisfies the requirement without selling holdings.
Ages, factors and account-type rules in this area are set by statute and revised periodically, so anyone approaching the threshold should confirm current requirements with a professional.