How a Required Minimum Distribution (RMD) Works

There comes a point where the IRS requires that a participant or beneficiary must take funds out of a retirement plan or risk significant excise taxes.  This is referred to as a Required Minimum Distribution (RMD) and is required within a certain period following the participant’s attainment of age 70 ½, or if later, the year in which the participant retires.  However, if the participant is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the participant is age 70 ½, regardless of whether the participant is retired.  This affects participants in qualified plans, 403(b) plans, 457 plans, and IRA owners (including SEPs, SARSEPs and SIMPLE IRAs).

The first RMD must be taken for the year in which the participant turns age 70 ½.  RMDs are required to be taken by December 31^st, however, the first payment can be delayed until April 1^st of the year following the year that a participant attains age 70 ½.   Of note, if a participant delays his or her first payment to April 1^st, there will be two payments required in that year – the second payment will be required by December 31^st that same year.  

RMDs are calculated by dividing the prior December 31^st account balance by the life expectancy factor in the IRS published Tables.  A participant can request a distribution that is higher than the RMD amount, however, if the participant fails to withdraw a RMD, fails to withdraw the full required amount, or misses the deadline for withdrawal, the amount not withdrawn is taxed at 50%.

Although the IRA custodian or retirement plan administrator may calculate the RMD amount, the participant is ultimately responsible for calculating the amount of the RMD.  Required Minimum Distribution amounts cannot be rolled over into another tax-deferred account. 

Please consult your tax advisor with questions surrounding RMDs or visit the IRS website and other useful industry resources via http://www.abgncs.com/RetirementIndustryLinks.aspx. 

The Author: Patty Richeson, QKA

Wholesale Retirement Plan Consultant

www.abgncs.com/RetirementAdministration.aspx

pricheson@abg-mn.com