What is an RMD?
Required Minimum Distributions (RMDs) are minimum amounts that a retirement plan account owner must withdraw annually. If you are still actively employed with the employer that sponsors your retirement plan, you may waive taking your RMD. However, if the retirement plan account is an IRA or the account owner is a 5% or more owner of the business sponsoring the retirement plan, the RMDs must begin regardless of whether he or she is still working.
Retirement plan participants and IRA owners are responsible for taking the correct amount of RMDs on time every year from their accounts. You may have to pay a 25% excise tax penalty (reduced from 50%) on the amount not distributed as required. This could be reduced to 10% if certain requirements are met.
The RMD rules apply to all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs, IRA-based plans. Roth 401(k) accounts will be exempt from the RMD rules beginning in 2024. The RMD rules do not apply to Roth IRAs while the owner is alive.
When am I required to begin taking RMDs?
You must take your RMD for the year in which you turn your RMD age. A participant may take the first RMD as late as April 1 of the year following the year of the RMD age. For all subsequent years you must take the RMD annually by December 31. If you delay your first RMD distribution until April 1, you will be required to take a second RMD by December 31 of that same year. All years thereafter will only require one RMD to be taken by December 31.
|Date of Birth||RMD Age|
|Before July 1, 1940||70 1/2|
What are my options for taking my RMD?
Your retirement plan will determine if you have the ability to receive this in one lump-sum annually or in installments through the year; please check with your Plan Administrator for details on this. If you have money in more than one plan, you must take the RMD from each plan separately (qualified plans and IRAs have different rules). RMD’s are not eligible to be rolled over into another plan or IRA account.
How is my RMD calculated?
The required minimum distribution is determined by taking the prior account balance as of December 31 and divided by a life expectancy factor published by the IRS. You may access worksheets and tables on the IRS website at:
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions. Your Plan Administrator may provide you the current RMD amount however the account owner is ultimately responsible for calculating and taking the RMD.
IRS Provides Guidance and Relief
Secure Act 2.0 modified RMD rules that delayed RMDs for 401(k), 403(b) and 457(b) plans. The change created a delay in the Required Beginning Date for those participants born in 1951 that would turn age 72 in 2023. Under Secure Act 1.0 those participants would have had a required beginning date of April 1, 2024. Then came along Secure Act 2.0. Secure Act 2.0changed the RMD age to 73. Consequently, this caused a one-year delay in RMDS for participants born in 1951 and would have a Required Beginning Date of April 1, 2025.
Due to the delay, this created a situation for those participants born in 1951 because recordkeepers and financial institutions already began processing auto-mated RMDS for participants based on Secure Act 1.0. Two problems occurred with this situation:
- Due to the change in the Required Beginning Date for participants born in 1951, there was no RMD due (unless the RMD was otherwise required under the plan document).
- Also, the distribution violated the terms of the plan document because there was not an RMD due. Therefore, the distribution was not treated as eligible for rollover and the 20% mandatory federal tax withholding was not withheld.
On July 14, 2023, the IRS granted a transitional relief for RMDS for those participants born in 1951 and that have already received an RMD:
- The IRS is allowing the 60-day rollover rule for RMDs processed from January 1, 2023 to July 31, 2023 for participants born in 1951. Those affected participants (including a participant’s surviving spouse) will have until September 30, 2023 to rollover their “mischaracterized RMDs”.
This also allows the participant to rollover the distributed funds back into the plan.
- Plans will not be penalized for failing to treat the distributions as eligible for rollover.
The notice does not cover if the plan sponsor is responsible for notifying the affected participants about the mischaracterized RMD and the extended rollover deadline date. If participants are not notified, they may not find out about this window of opportunity to rollover their mischaracterized RMD.