For qualified retirement plans and individual retirement accounts (IRAs) to receive tax favorable treatment by the IRS, they must meet certain requirements. One of those requirements is the minimum distribution rule. This means that qualified plans and IRAs must distribute assets to the owner no later than a specific date, called the “required beginning date.”

The required beginning date is usually April 1 of the year after the account owner reaches age 70 ½. However, a qualified plan participant who is not a 5% owner of the company and who has not yet retired can delay taking distribution until April 1 of the year after retiring. The first required minimum distribution payment can be delayed until April 1 of the year following the year in which he or she turns 70 ½. For all future years, including the year in which the first RMD was paid by April 1, the account owner must take the RMD by December 31.

Business Owners, please note that if the owner of the qualified retirement account is a 5% owner of the business sponsoring the retirement plan, the required minimum distribution (RMD) must begin at age 70 ½, even if the owner has not yet retired. 

It is the responsibility of the IRA owner or retirement plan participant to take the correct amount of RMD on time every year. Often the IRA custodian or a retirement plan administrator will calculate the amount of the RMD, but it is ultimately up to the owner of the IRA or retirement plan account owner to properly calculate the amount to be withdrawn.

Failure to comply with these rules results in a 50% penalty tax to the IRA owner on the amount that should have been distributed, a costly consequence. For example, if the RMD was $2,000 and the account owner withdrew only $800, a 50% penalty would be imposed on the $1,200 not withdrawn.

The RMD is, indeed, a minimum. More than the minimum amount can be withdrawn and will be taxed at his or her current income tax rate on the amount of RMD withdrawn. RMDs cannot be rolled over to other retirement savings vehicles.

These rules apply to employer-sponsored retirement plans including profit sharing plans, 401(k) plans and 403(b) plans. The rules also apply to traditional IRAs and IRA-based plans like SEPs, SARSEPs and SIMPLE IRAs.  The RMD rules apply to Roth 401(k) accounts, but not to Roth IRAs while the owner is alive.

This can be confusing so we recommend that you contact your retirement plan or wealth management advisor if you have questions about the RMD, how it is calculated or taxed. The IRS also offers info. about RMDs on its website.

To your wealth,

Joe Maas, CFA, AVA, CFP®, ChFC, CLU®, MSFS, CCIM
President of Synergetic Finance