Distributions from qualified retirement plans and IRAs must begin once a plan participant attains age 70 ½. This article will examine the rules surrounding the Required Minimum Distributions (RMD) to assist our clients and plan participants alike.
WHO IS REQUIRED TO TAKE A REQUIRED MINIMUM DISTRIBUTION?
You must begin to take withdrawals from your account once you have attained age 70 ½ and one of two other things have occurred:
1. You are not actively employed at the company who sponsors the plan in which you have an account; or
2. You own more than 5% of the company (stock ownership, or partnership interest) who sponsors the plan in which you have an account.
WHEN MUST THE REQUIRED MINIMUM DISTRIBUTION BE WITHDRAWN?
Distributions from your account must be processed before December 31 each year. One exception exists for this timing: your first distribution may be delayed until April 1 of the year following the year in which you attain age 70 ½.
For example, your birthday is February 2, 1943. You would attain age 70 ½ on August 2, 2013. Assume you are either retired or own more than 5% of your company’s stock. Your first RMD would be required on December 31, 2013, but you could elect to delay that distribution until April 1, 2014. Your second RMD would be due December 31, 2014.
FROM WHAT ACCOUNTS MUST I TAKE A REQUIRED MINIMUM DISTRIBUTION?
An RMD is required from each qualified retirement plan in which you have an account.
For example, if you have both a 401(k) and a Pension with your employer, you must take an RMD from both the 401(k) plan and the Pension plan.
IRAs may be combined together for purposes of calculating your RMD, but you do not need to take an RMD from each IRA
For example, if you own 3 separate IRAs worth $50,000 each, you can combine those IRAs to calculate your RMD. If you are age 73, the minimum distribution on an account balance of $150,000 would be about $6,073. You could elect to take the $6,073 from one of your IRAs and leave the other two alone.
Planning tip: This IRA rule may be helpful if not all of your IRAs have flexibility with respect to withdrawals – perhaps the investments are locked up or there is a surrender charge.
ARE ROTH ACCOUNTS SUBJECT TO THE REQUIRED MINIMUM DISTRIBUTION RULES?
Roth accounts in 401(k) or 403(b) plans are subject to the RMD rules. The Roth portion of the account has the RMD calculated separately from the pre-tax component of your account. Since RMD is not eligible for rollover, a person cannot elect a rollover distribution from his account to avoid the RMD requirement.
RMDs are not required from Roth IRAs.
Planning tip: Since Roth IRAs are not subject to the RMD rules, consider rolling your Roth 401(k) or 403(b) account to a Roth IRA if allowed by your plan. You will have to take the RMD in the year you process the transfer, but you could avoid future RMDs on the account.
HOW ARE REQUIRED MINIMUM DISTRIBUTIONS CALCULATED?
Distributions are calculated by dividing your account balance from December 31 of the prior year by the appropriate factor from the Uniform Lifetime Table published by the IRS. The factors on the table start at 27.4 for someone who is age 70, and drops to 26.5 for someone 71.
For example, your account balance is $350,000 on December 31, 2012, and you attained age 70 ½ in 2013. Your RMD for 2013 would be $350,000/27.4 = $12,774. You can withdraw that amount by December 31, 2013 or delay until April 1, 2014.
In 2014 your account grows by 5%, so the 2014 RMD calculation would be performed as follows: ($350,000-$12,774)*1.05 = $354,087/26.5 = $13,362. The $13,362 must be withdrawn by December 31, 2014.
Planning tip: The first year delay may be helpful, but you may end up with two taxable distributions in one year. Ask your tax consultant to assist you in deciding whether the first year delay would be beneficial or detrimental to your tax situation.
Planning tip: If your primary beneficiary is more than 10 years younger than you are, you may be eligible to pull your RMD factor from the Joint and Last Survivor Table instead of the Uniform Lifetime Table.
WHAT IS THE PENALTY FOR FAILURE TO TAKE A REQUIRED MINIMUM DISTRIBUTION?
An excise tax equal to 50% of the RMD is imposed on an individual who fails to take his minimum distribution on time or in the appropriate amount.
The company that sponsors the qualified plan may also find that they failed to administer their plan according to its terms if they fail to process RMDs for those plan participants for whom they are required.
Planning tip: The IRS does offer through its Voluntary Compliance Program (VCP) a correction to failing to process an RMD. The expense to prepare and file the application for VCP may be less than the 50% excise tax penalty. Here at Benefit Resources, Inc. we have experience filing such VCPs, so click here if you would like to submit an email question to us about this process.
WHERE CAN I FIND ADDITIONAL INFORMATION ON THESE RULES?
IRS Bulletin 2004-26 called “Requirement Minimum Distributions from Retirement Plans” has additional information. It can be viewed at http://www.irs.gov/irb/2004-26_IRB/ar07.html. This Bulletin was written in 2004, however, and some of the rules have been updated since then.
SUMMARY
At Benefit Resources we are busy at this time of year making sure that all of the participants in plans that we administer have the proper calculations and information about taking their RMDs and we confirm that the withdrawals are processed timely. This is another example of how we help our clients oversee their plan and avoid pitfalls that may trip them up. If your TPA or provider doesn’t provide you with this type of service, we would love to have you consider us! Click here to request a proposal from us or to have one of our friendly consultants give you a call. Happy retirement!
WHO IS REQUIRED TO TAKE A REQUIRED MINIMUM DISTRIBUTION?
You must begin to take withdrawals from your account once you have attained age 70 ½ and one of two other things have occurred:
1. You are not actively employed at the company who sponsors the plan in which you have an account; or
2. You own more than 5% of the company (stock ownership, or partnership interest) who sponsors the plan in which you have an account.
WHEN MUST THE REQUIRED MINIMUM DISTRIBUTION BE WITHDRAWN?
Distributions from your account must be processed before December 31 each year. One exception exists for this timing: your first distribution may be delayed until April 1 of the year following the year in which you attain age 70 ½.
For example, your birthday is February 2, 1943. You would attain age 70 ½ on August 2, 2013. Assume you are either retired or own more than 5% of your company’s stock. Your first RMD would be required on December 31, 2013, but you could elect to delay that distribution until April 1, 2014. Your second RMD would be due December 31, 2014.
FROM WHAT ACCOUNTS MUST I TAKE A REQUIRED MINIMUM DISTRIBUTION?
An RMD is required from each qualified retirement plan in which you have an account.
For example, if you have both a 401(k) and a Pension with your employer, you must take an RMD from both the 401(k) plan and the Pension plan.
IRAs may be combined together for purposes of calculating your RMD, but you do not need to take an RMD from each IRA
For example, if you own 3 separate IRAs worth $50,000 each, you can combine those IRAs to calculate your RMD. If you are age 73, the minimum distribution on an account balance of $150,000 would be about $6,073. You could elect to take the $6,073 from one of your IRAs and leave the other two alone.
Planning tip: This IRA rule may be helpful if not all of your IRAs have flexibility with respect to withdrawals – perhaps the investments are locked up or there is a surrender charge.
ARE ROTH ACCOUNTS SUBJECT TO THE REQUIRED MINIMUM DISTRIBUTION RULES?
Roth accounts in 401(k) or 403(b) plans are subject to the RMD rules. The Roth portion of the account has the RMD calculated separately from the pre-tax component of your account. Since RMD is not eligible for rollover, a person cannot elect a rollover distribution from his account to avoid the RMD requirement.
RMDs are not required from Roth IRAs.
Planning tip: Since Roth IRAs are not subject to the RMD rules, consider rolling your Roth 401(k) or 403(b) account to a Roth IRA if allowed by your plan. You will have to take the RMD in the year you process the transfer, but you could avoid future RMDs on the account.
HOW ARE REQUIRED MINIMUM DISTRIBUTIONS CALCULATED?
Distributions are calculated by dividing your account balance from December 31 of the prior year by the appropriate factor from the Uniform Lifetime Table published by the IRS. The factors on the table start at 27.4 for someone who is age 70, and drops to 26.5 for someone 71.
For example, your account balance is $350,000 on December 31, 2012, and you attained age 70 ½ in 2013. Your RMD for 2013 would be $350,000/27.4 = $12,774. You can withdraw that amount by December 31, 2013 or delay until April 1, 2014.
In 2014 your account grows by 5%, so the 2014 RMD calculation would be performed as follows: ($350,000-$12,774)*1.05 = $354,087/26.5 = $13,362. The $13,362 must be withdrawn by December 31, 2014.
Planning tip: The first year delay may be helpful, but you may end up with two taxable distributions in one year. Ask your tax consultant to assist you in deciding whether the first year delay would be beneficial or detrimental to your tax situation.
Planning tip: If your primary beneficiary is more than 10 years younger than you are, you may be eligible to pull your RMD factor from the Joint and Last Survivor Table instead of the Uniform Lifetime Table.
WHAT IS THE PENALTY FOR FAILURE TO TAKE A REQUIRED MINIMUM DISTRIBUTION?
An excise tax equal to 50% of the RMD is imposed on an individual who fails to take his minimum distribution on time or in the appropriate amount.
The company that sponsors the qualified plan may also find that they failed to administer their plan according to its terms if they fail to process RMDs for those plan participants for whom they are required.
Planning tip: The IRS does offer through its Voluntary Compliance Program (VCP) a correction to failing to process an RMD. The expense to prepare and file the application for VCP may be less than the 50% excise tax penalty. Here at Benefit Resources, Inc. we have experience filing such VCPs, so click here if you would like to submit an email question to us about this process.
WHERE CAN I FIND ADDITIONAL INFORMATION ON THESE RULES?
IRS Bulletin 2004-26 called “Requirement Minimum Distributions from Retirement Plans” has additional information. It can be viewed at http://www.irs.gov/irb/2004-26_IRB/ar07.html. This Bulletin was written in 2004, however, and some of the rules have been updated since then.
SUMMARY
At Benefit Resources we are busy at this time of year making sure that all of the participants in plans that we administer have the proper calculations and information about taking their RMDs and we confirm that the withdrawals are processed timely. This is another example of how we help our clients oversee their plan and avoid pitfalls that may trip them up. If your TPA or provider doesn’t provide you with this type of service, we would love to have you consider us! Click here to request a proposal from us or to have one of our friendly consultants give you a call. Happy retirement!
Image courtesy of imagecreator / FreeDigitialPhotos.net
