The Pension consultants at Planmark regularly receive calls on a broad array of technical topics related to qualified retirement plans. A recent call with a HR manager of a Marietta, Ga plan sponsor client is a commonly asked question about required minimum distributions (RMDs). The plan sponsor asked:
“I have an employee who has been told by his accountant that he must begin paying tax on his 401(k) account, even though he has not retired. It’s something about his age, (he just turned 70) and that the IRS requires him to begin taking money from his 401(k), even though he is still working. Is that right?”
And the answer is maybe….maybe not. The rules are different for a 401(k) plan than for a traditional IRA, and different if you are a 5% or more owner of the company sponsoring the 401(k) plan.
Why a Required Minimum Distribution (RMD)?
Because these withdrawals are taxable and raise revenue for our government. All distributions are taxable at ordinary income tax rates. The IRA/401k plan has enjoyed tremendous tax benefits throughout the account holders saving history. All the contributions have been tax deductible and none of the earnings have been taxable…up to this point. You may recall the old adage “too much of a good thing has to come to an end”.
When do RMDs start?
In most cases, the so-called “Required Beginning Date” is the year in which you turn 70½. For the first year, the deadline is by April 1 of the year following the year in which you turn 70½.
Why 701/2? Who knows, some congressional staffer threw a dart and it landed on 70½.
Generally, the Required Beginning Date for traditional IRAs is the year you turn 70½ regardless of whether you are still working. However, if you are still working at age70½ for the employer sponsoring the plan in question, and assuming you do not own 5% or more of that employer, you can further postpone RMDs until you retire.
How much must I withdraw?
The RMD is calculated for each account by dividing the prior December 31 balance of that account by a life expectancy factor that IRS publishes in Tables. See IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) or IRS Publication 560 Retirement Plans for Small Business
What if I don’t take withdrawals?
If you fail to take at least the RMD for any year (or if you take it too late), you will be subject to a federal tax penalty. The penalty is a 50 percent excise tax on the difference between the amount you withdrew and the amount you should have withdrawn.
What if I have both a IRA and a 401(k) account?
If you maintain IRA accounts in addition to your employer-sponsored 401(k) plan, you will be required to take a required distribution from each type of plan separately. You may aggregate the total amount of your IRA distribution if you have multiple accounts, and receive a distribution from just one of your IRA accounts. However, an RMD from a qualified retirement plan (including 401(k) plans) must be calculated and distributed independently. So if you have both types of accounts, you will be required to receive at least two distributions each year.
If you are still working past age 701/2, and, as long as you own less than 5% of the business you are working for, you are not required to take an RMD from that company’s 401kplan until you actually retire.
The Resource Desk is staffed by the pension experts at Planmark Financial Group, Inc.,
a third-party plan administration firm. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Planmark does not provide tax or legal advice.
Consumers consult with their tax advisor or attorney regarding their specific situation.