Does your retirement plan call for a Required Minimum Distribution? If it does but you haven’t yet taken the RMD, the clock is rapidly ticking. You’ll need to calculate and schedule your RMD in plenty of time so you don’t miss the Dec. 31 deadline and face costly penalties.
All employer-sponsored retirement plans – including 401(k), 403(b), 457(b) and some other defined contribution plans – are subject to Required Minimum Distributions beginning April 1 of the year after the one in which you turn 70½ (in most cases). Distributions are taxable at ordinary-income rates unless they are from a Roth account.
5 Things to Know about Required Minimum Distributions
Here are five of the most commonly asked questions:
How is the RMD Calculated?
To calculate the Required Minimum Distribution for your 401(k) or retirement account, take the balance of the account as of the prior Dec. 31 and divide it by a life expectancy factor as found in the tables in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). There are several tables from which to choose, based on your situation:
- Joint and Last Survivor Table – Use this if the sole beneficiary of the account is your spouse and your spouse is more than 10 years younger than you.
- Uniform Lifetime Table – Use this if your spouse is not your sole beneficiary or your spouse is not more than 10 years younger.
- Single Life Expectancy Table – Use this if you are a beneficiary of an account (an inherited IRA).
Other worksheets apply for 403(b) plans, which are subject to different rules.
When Do I Have to Start Taking a Required Minimum Distribution?
The IRS mandates that you take your first RMD by April 1 of the year after the calendar year in which you turn 70½ years old. For each subsequent year after you begin taking Required Minimum Distributions, you must withdraw your RMD by Dec. 31. In some cases, you may be able to apply the “still working” exception and delay taking the Required Minimum Distribution from the plan sponsored by your employer.
Can I Withdraw More Than the Required Minimum?
Yes, you may withdraw more than the required amount without penalty, as long as you meet the minimum.
What is the Penalty for Not Taking the RMD?
If you fail to take the minimum distribution required, you incur a penalty equal to 50% of the amount that you should have withdrawn, minus whatever amount you did take for the year. For example, if you were required to withdraw $5,000 and took out only $1,000, the penalty is $2,000 (50% of $4,000). The penalty is in addition to any other tax you owe on the Required Minimum Distribution and is your responsibility.
What if I Die Before I Retire?
If you die before you retire, there is no Required Minimum Distribution due for the year in which you died. However, your beneficiaries will be subject to Required Minimum Distributions. A number of factors determine the particular rules to which they are subject (such as whether they are a spouse or non-spouse, whether they directly roll the funds over to an IRA by the applicable date or other circumstances).
For More Information
You can find answers to many of your questions about Required Minimum Distributions on the IRS’ website. Because the subject can be complex and intimidating, it might make sense to consult a tax or financial expert for guidance.