Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

Required Minimum Distributions: It pays to be older

As the saying goes, some things get sweeter with time and your 401k is no different. Starting with the year that a retirement plan account owner reaches 70 ½, or, if later, the year in which they retire, they are required to withdraw a minimum amount of money from their account every year. This is known as a Required Minimum Distribution.

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A retirement plan account owner is able to withdraw more than the minimum amount calculated, however, it is important to note that this will be reported as taxable income unless it was already taxed (such as Roth contributions). If the account is a Roth account, the rules are slightly different as RMDs are not required until after death. Additionally, if the account owner decides to take an amount in excess of the required amount, they cannot apply this to avoid an RMD for a future year.

Am I required to take the distribution by a certain date?

An account owner can delay the distribution until April 1st of the year subsequent to turning 70 ½. After this first required distribution, they must take the minimum withdrawal by December 31st each year. If they do not receive the full required distribution by the deadline, the IRS imposes a severe 50% tax on any amount not withdrawn from the account.

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Who calculates the required minimum amount and how is it calculated?

The RMD can be calculated by the custodian of the plan or the plan administrator. While these parties may calculate the amount required to be withdrawn, it is essential to understand that the account owner or beneficiary is ultimately responsible for the calculation. The calculation divides the December 31st account balance by the life expectancy factor obtained from various IRS tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). These tables include Joint and Last Survivor Table, Uniform Lifetime Table, and Single Life Expectancy Table; the appropriate table to use in the calculation depends upon your individual circumstances.

If you are nearing the age of 70 ½ and have additional questions regarding Required Minimum Distributions, it would be beneficial to reach out to your plan administrator prior to the year you are required to withdraw.

If you still have any questions about required minimum distributions, feel free to reach out to a Henry+Horne professional to assist you.

Shelby Milburn