Required Minimum Distributions (“RMDs”)
What Are RMDs?
An RMD is the minimum amount that must be withdrawn from certain retirement plans each year. The IRS calculates the RMD amount by dividing a participant’s account balance as of December 31 of the prior year by an IRS life expectancy factor. For example, suppose you have a 79-year-old retiree with an account balance of $100,000 at the end of the previous year. Using the IRS Uniform Lifetime Table, the distribution period for an unmarried, 79-year-old account owner is 19.5. Thus, you would divide $100,000 by 19.5, resulting in a distribution of $5,128.21. If the participant has a spouse who is more than 10 years younger and is the participant’s only beneficiary, the calculation also considers the spouse’s age.
When Do RMDs Start?
When participants turn age 70½, and if they are not 5% owners of the company sponsoring the plan, they must begin taking RMDs from the plan by April 1 of the calendar year following the later of:
- The calendar year in which participants reach age 70½, or
- The calendar year in which participants retire
If a participant owns 5% or more of the business sponsoring the retirement plan, he or she cannot delay the RMDs until retirement. These participants must begin receiving RMDs by April 1 of the year following the calendar year in which they turn age 70½. The IRS defines the date a participant turns 70½ as six calendar months after a participant’s 70th birthday.
After the first year, plans must distribute RMDs by December 31 of each year. And if a participant postpones the first RMD until April 1 of the following year, he or she must receive two RMDs in that following year. Depending on the RMD amounts, receiving two RMDs in the same year could push the participant into a higher tax bracket, resulting in higher income taxes on the RMDs.
The plan document defines the start date of RMDs.
Which Accounts Must Make RMDs?
All qualified retirement plans — as well as traditional IRAs — must comply with RMD rules. Roth IRA rules don’t require account owners to take RMDs. Generally, if a participant has more than one qualified plan account, the IRS requires that the participant calculate and distribute the RMDs separately for each account. Participants with more than one traditional IRA, however, are permitted to aggregate the balances to determine the RMD.
What If a Participant Doesn’t Take an RMD?
Once a participant becomes subject to RMD rules, he or she must receive a distribution of at least a required minimum amount each calendar year. Retirement plan participants and IRA account owners must take their minimum distribution amounts by the December 31 deadline regardless of whether they need the income.
Failure to take an RMD on time — or taking less than the required minimum amount — may result in significant IRS penalties. The excise tax is equal to 50% of the amount that wasn’t distributed by the RMD deadline. In addition to the 50% excise tax and income tax, the participant must still take the RMD. These penalties are the responsibility of the account owner, not the plan.
The End of the Year is Near
While it’s ultimately the account owner’s responsibility to calculate and take the RMD, many group plan participants rely on the plan sponsor for a reminder. Retirement plan sponsors and administrators should communicate RMD rules to participants and calculate the RMD amounts when necessary.
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