Required minimum distributions (RMDs) are minimum amounts certain participants (or retirement account owners if the participant has passed) must take as distributions from their account on an annual basis. Generally, RMDs begin the year in which the participant reaches the age of 70 ½ or the year in which the participant retires, provided they are not a 5% or greater owner of the Company. Depending on the terms of the Plan, the initial RMD can be delayed until April 1st of the year following attainment of the two criteria previously noted. For all subsequent years, the RMD must be made by December 31st. An important thing to note is the December 31st RMD will still be due even if the initial RMD was withdrawn in the same year.
RMDs are calculated each year by dividing the prior December 31st account balance by the life expectancy factor published by the IRS. There are three different life expectancy tables to choose from based on the participant’s individual situation:
- Joint and Last Survivor Table – to be used if the sole beneficiary of the account is a spouse and the spouse is more than ten years younger than the participant
- Uniform Lifetime Table – to be used if the sole beneficiary of the account is not a spouse and the spouse is not more than ten years younger than the participant
- Single Life Expectancy Table – to be used by a beneficiary after the participant has died
These tables can be found in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
RMDs must be calculated separately for each account a participant owns. Certain types of retirement accounts require the distributions to be made from each account as calculated; however, in some instances the withdrawal can be made from only one account or any combination of accounts owned. RMDs may be calculated by a Plan sponsor or custodian; however, it is ultimately the participant’s responsibility to ensure this is done. The penalty for not withdrawing the full amount of a calculated RMD or withdrawing the amount after the deadline is a 50% tax on the amount not withdrawn.
By Crystal L. Becerril, CPA