Once you reach age 70 ½, the IRS requires you to take money out of your retirement account. This withdrawal is called a Required Minimum Distribution (RMD). Most people don’t give RMDs much thought until they have to take one.
Required Beginning Date
For defined contribution plans such as a 401(k), the beginning date for non-owners is the later of the April 1 following the calendar year in which an employee reaches age 70½ or the April 1 following the calendar year in which an employee terminates employment. An owner’s beginning date is the April 1 following the calendar year in which employee attains age 70½.
Distributions from your account must be processed before December 31 each year. Therefore, you will need to take two RMDs in the first year if you delay your payment until the April 1st of the year immediately following your 70 1/2 birthday. If you’re still working, you can delay taking RMDs from your employer-sponsored retirement plan until the April 1 following the calendar year after you stop working.
The amount withdrawn is based on your account balance, your age, and the age of your spouse (if married).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. Please contact your plan administrator at Watkins Ross if you have questions regarding the minimum distribution rules from your qualified plan. If you have someone in your personal network that has questions, please let us know.