Don’t forget about Required Minimum Distributions

Don’t forget about Required Minimum Distributions

If you are in your late 60’s, you should be aware of the required minimum distribution (RMD) obligations beginning at age 70½ for your individual IRAs and possibly your 401(k) plans.

IRAs vs. 401(k)s

Generally, IRA account holders must take RMDs on reaching age 70½. However, the first payment can be delayed until April 1 of the year following the year in which the individual turns 70½. (For inherited IRAs, RMDs are generally required earlier.)

401(k) accounts are a different story. Account holders don’t have to begin taking distributions from their 401(k)s if they’re still working for the employer sponsoring the plan. Although the regulations don’t state how many hours employees need to work to postpone 401(k) RMDs, they must be doing legitimate work and receiving wages reported on a W-2 form.

There’s an important exception, however: Workers who own at least 5% of the company must begin taking RMDs from the 401(k) beginning at 70½, regardless of their work status.

If someone has multiple IRAs, it doesn’t matter which one he or she takes RMDs from so long as the total amount reflects their aggregate IRA assets. In contrast, RMDs based on 401(k) plan assets must be taken specifically from the 401(k) plan account.

Other pertinent facts

Here are some additional RMD facts you might want to be aware of in order to remain informed:

Calculation of RMD. The IRS determines how RMD amounts change as the account holder ages, using a formula and life expectancy tables. For example, at age 72, the IRS “distribution period” is 26.5, meaning that the IRS assumes that the individual will live another 26½ years. Thus, he or she must withdraw the percentage of the IRA or 401(k) account that is 1 divided by 26.5 (3.77%).

Beneficiary spouses. Account holders who have a beneficiary spouse at least 10 years younger are subject to a different RMD formula that allows them to take out smaller amounts to preserve retirement assets for the younger spouse.

Tax penalty. The penalty for withdrawing less than the RMD amount is 50% of the portion that should have been withdrawn but wasn’t.

Form of distribution. RMDs can be in cash or be taken in stock shares whose value is the same as the RMD amount. Although this can be administratively burdensome for you as the employer, it allows your employees to defer incurring brokerage commissions on securities they don’t want to sell.

Click here to read about how the new tax law affects RMDs.   If you have any questions, please contact hb&k.

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