Once you reach age 70 ½ the IRS requires you to take money out of your retirement account, called a Required Minimum Distribution (RMD). Most people don’t give RMDs much thought until they have to take one.
For defined contribution plans such as a 401(k), the beginning date for non-owners is the later of the April 1 of the calendar year following the calendar year in which an employee reaches age 70½ or the April 1 of the calendar year following the calendar year in which employee terminates employment. An owner’s beginning date is the April 1 of the calendar year following the calendar year in which employee attains age 70½.
Distributions from your account must be processed before December 31 each year. Keep in mind that if you wait until April 1st of the year immediately following your 70 1/2 birthday, you will need to take two RMDs that year. If you’re still working, you can delay taking RMDs from your employer-sponsored retirement plan until April 1st of the year after you stop working.
The amount you have to withdraw is based on your account balance, your age, and the age of your spouse if you are married. Distributions are calculated by dividing your account balance from December 31 of the prior year by the appropriate factor from the tables provided by the IRS.
An RMD is required from each qualified retirement plan in which you have an account. If you fail to take some or all of your RMD, the IRS will impose a 50% penalty tax.
Given the hefty tax consequences, individuals should ensure their RMD calculations and distributions meet regulatory requirements. If you have questions regarding the minimum distribution rules from your qualified plan, contact your plan administrator at Watkins Ross.