When a taxpayer reaches age a certain age, he or she must begin withdrawing minimum amounts from all tax-favored retirement accounts each year. This includes both company-sponsored retirement plans, like a 401(k), as well as IRAs. Thanks to a new law called the SECURE Act, which was signed into law on December 20, 2019, we are in a transition period as to what that “certain age” is. Throughout the remainder of this FAQ, when we refer to participants who are age 72, we are also referring to those who reached age 70 ½ on or before December 31, 2019. In short, taxes. The tax benefits afforded to certain types of retirement accounts are there to incentivize people to save for their retirement. Those benefits are often in the form of a tax deferral, meaning that amounts are deductible when contributed to the plan and taxable at the time of withdrawal. Congress was concerned that these accounts could be used as a way to permanently avoid taxation if the funds accumulated there indefinitely. The RMD rules address this by requiring that a portion be withdrawn each year. The RMD rules apply to taxpayers who are at least age 72; however, there are some additional nuances depending on whether the retirement account is an IRA or a company-sponsored retirement plan. These are fairly straightforward.Anyone who is age 72 and has an IRA is required to take an RMD. The requirement to take an RMD depends on whether the individual in question is an owner of the company and whether he or she is still actively employed. It should also be noted that if a participant who is age 72 passes away, his or her beneficiary may be required to take RMDs even though that person might be under age 72.
What are required minimum distributions (RMDs)?
What is the point of this requirement?
Who is required to receive a required minimum distribution from a qualified plan?
IRA
Company Sponsored Retirement Plans
Note: For active participants who reached age 70 1/2 on or before December 31, 2019, the RMD requirement kicks in on April 1st of the year following the later of the year the participant reached age 70.5 or the year he or she terminates employment.
How is the amount of the RMD calculated?
There are a couple of factors that go into the calculation: the total value of the participant’s account and a life expectancy table published by the IRS. There are several variations of the life expectancy table, but in virtually all RMD calculations, the Uniform Lifetime Table is used.
- Account Value: Use the value as of the last day of the previous plan year. For example, use the value as of December 31, 2019 to calculate the RMD for 2020.
- Uniform Lifetime Table: Use the factor that corresponds to the participant’s attained age for the year of the RMD. For example, for the 2020 RMD, use the factor the corresponds to the participant’s age in 2020. The factor for someone who is 70 ½ is 27.4, and it gradually decreases for each subsequent year.
The RMD amount is simply the account value divided by the factor from the table.
Note that if a participant’s sole beneficiary is his or her spouse and that spouse is more than 10 years younger, the Joint Life and Last Survivor Expectancy table should be used.
What is the deadline for taking the RMD each year?
RMDs are due by December 31of each year; however, for the year a participant first turns age 72, the initial RMD deadline is not until April 1stof the following year. For example, a participant who reaches age 72 in 2022 has until April 1, 2023 to take his or her first RMD, with each subsequent RMD paid by December 31of each year.
It is important to note that that same participant is also required to take an RMD for 2023 no later than December 31, 2023. That means he or she ends up taking two RMDs in the same year and then a single RMD in each year thereafter.
Important Note:Work with your recordkeeping service provider or platform provider to processdistributionstimely, as most platforms will have a deadline of mid-December to ensure the checks can be processed and delivered before the end of the plan year. Your recordkeeping service provider, platform, TPA, or investment advisor is not authorized to approve or process an RMD without a distribution form.
What if the RMD is not processed in a timely way?
The penalty for failure to timely take an RMD is 50% of the amount that should have been distributed, and it is assessed against the taxpayer.
The taxpayer can ask the IRS to waive the penalty by filing Form 5329 along with a letter of explanation. Taxpayers should work with their accountants or other tax advisors for assistance in requesting the waiver. In some circ*mstances, if the delay is due to an oversight on the part of the plan sponsor, it may be possible to request a waiver of the penalty via the IRS Voluntary Correction Program.
Is it possible to rollover an RMD to an IRA?
No, RMDs are not eligible for rollover since moving them from one tax-deferred account to another would defeat the purpose of the RMD in the first place. However, to the extent a participant takes a distribution for more than the RMD amount, the additional portion can generally be rolled over.
Is there mandatory tax withholding from RMD?
Because an RMD cannot be rolled over, the mandatory 20% tax withholding does not apply. Rather, the default withholding rate is 10% of the RMD amount; however, a participant can elect to have more or less withheld, and may even choose to waive withholding altogether. Absent a specific employee election to the contrary, the default withholding should be 10%.
If a participant has several IRAs and company-sponsored retirement accounts, can they all be combined with the RMD taken from a single account?
It depends on the types of accounts in question. Company-sponsored plan accounts cannot be combined. The participant must take a separate RMD from each such account, and the amount is calculated separately for each plan.
However, if a taxpayer has multiple IRAs, it is possible to take the aggregate RMD due (based on the combined balances in all the IRAs) from one IRA account. But, the qualified plan RMDs must still be paid separately and cannot be aggregated with the IRAs.
My plan has a participant that has reached the minimum age requirement for an RMD. Do you have a sample letter that we can customize and send to our participants?
Yes! Click here to download a sample letter in Word format for participants who have reached the applicable RMD age.
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As an expert in retirement planning and tax regulations, I bring a wealth of knowledge to the topic of required minimum distributions (RMDs). With extensive experience in financial planning and a deep understanding of the tax code, I aim to provide you with comprehensive insights into the concepts mentioned in the article.
Required Minimum Distributions (RMDs): An In-Depth Analysis
Background and Legislative Changes: The concept of RMDs stems from the Internal Revenue Service's (IRS) strategy to ensure that tax-favored retirement accounts serve their intended purpose—encouraging long-term savings for retirement. The legislative landscape underwent a significant change with the introduction of the SECURE Act on December 20, 2019. This Act altered the age at which individuals are required to start withdrawing minimum amounts from their retirement accounts.
For individuals born on or before July 1, 1949, the RMD start age is 70 ½, while those born after July 1, 1949, must adhere to the new rule, commencing RMDs at age 72.
Applicability of RMD Rules: RMD rules apply primarily to taxpayers aged 72 or older. However, nuances exist based on the type of retirement account—Individual Retirement Accounts (IRAs) and company-sponsored retirement plans.
- IRAs: Individuals aged 72 with an IRA are required to take an RMD.
- Company-Sponsored Retirement Plans: For plan owners with more than a 5% stake, RMDs commence at age 72, irrespective of employment status. Non-owners must start RMDs at age 72 or upon termination of employment.
Calculating RMD Amounts: The calculation involves two key factors—the total account value and a life expectancy table, commonly the Uniform Lifetime Table published by the IRS. The RMD amount is determined by dividing the account value by the factor from the table corresponding to the participant's age.
Special considerations come into play when a participant's spouse is the sole beneficiary and is more than 10 years younger, requiring the use of the Joint Life and Last Survivor Expectancy table.
Deadline for RMDs: RMDs are generally due by December 31 of each year, with the initial RMD deadline for those turning 72 in a specific year extended to April 1 of the following year.
Consequences of Non-Compliance: Failure to timely take an RMD results in a hefty penalty of 50% of the required distribution amount. Taxpayers can seek a waiver of this penalty by filing Form 5329 along with an explanation.
Rollover and Withholding Considerations: RMDs cannot be rolled over since doing so would negate their intended purpose. Mandatory tax withholding at a rate of 10% applies by default, but participants can adjust this rate or choose to waive withholding.
Account Aggregation and Sample Letter: While IRAs allow aggregating RMDs from multiple accounts, company-sponsored plan accounts must be treated separately. The article provides a sample letter, aiding plan sponsors in communicating RMD requirements to eligible participants effectively.
In conclusion, understanding RMDs is crucial for effective retirement planning, ensuring compliance with tax regulations, and avoiding penalties. If you have further questions or need personalized advice, consult with a financial advisor or tax professional to navigate the intricacies of RMD rules tailored to your specific situation.
