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to withdraw a RMD, fails to withdraw the full required amount, or misses the deadline for withdrawal, the amount not withdrawn is taxed at 50%.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

Retirement Autopilot

To do more to help employees save for their future, many employers are incorporating automatic features into their retirement plans. These features can help employees start saving earlier, save in greater amounts and manage their savings more wisely, while also allowing employees to manage their own investments. Studies suggest that automating retirement plans significantly increase the percent of eligible workers who participate in such plans, which increases employees’ retirement savings and financial security.

So what are these automatic features?  And how do they work?

Automatic Enrollment is an automatic contribution arrangement (ACA) that can be used as a feature in a retirement plan to allow employers to enroll employees in the company’s plan automatically upon meeting eligibility requirements. Approximately 30% of eligible workers do not participate in their employer’s retirement plan. Studies suggest that automatic enrollment could reduce this rate to less than 15 percent, significantly increasing retirement savings.

Automatic Escalation is another plan design option which may be added to a retirement plan in conjunction with automatic enrollment.  Automatic escalation allows a plan sponsor to increase participant deferrals annually by a set increment, most commonly 1%. Plan sponsors electing this design feature typically do so to assist their employees with retirement readiness.

Whether you already have a retirement plan or are considering starting one, automatic features offer many advantages.  Learn more about these automation options here: http://www.abgncs.com/AutoFeatures.aspx.

The Author: Abby Murray

Interactive Media Coordinator

www.abgncs.com

info@abg-mn.com