As the calendar year draws to a close, older plan participants may have to consider taking a required minimum distribution (RMD) from their qualified retirement plan. A required minimum distribution is a withdrawal from a qualified retirement plan for participants who have reached the age of 70½. While many qualified plans have services to notify participants that they have to take an RMD, it is important for plan sponsors to understand the mechanics and rules governing required minimum distributions.
How is an RMD Calculated?
An individual’s RMD is normally calculated using the “Uniform Lifetime Table,” which is an IRS chart that assigns a “Life Expectancy Factor” to each age. The previous 12/31 balance is divided by the “Life Expectancy Factor” to calculate the required minimum distribution.
Other tables are used if either:
The spouse is the sole beneficiary and they are more than 10 years younger than the participant. OR
The account is an Inherited account where the participant has already passed away
If a person has multiple 401(k) accounts, the calculation will be done for each individual account and a distribution must be taken from each account. This is different than if a person has multiple IRAs.
When does an RMD have to be taken?
When a person reaches age 70 ½ , they are required to take an RMD by April 1 of the following year. Failure to take a required distribution from a plan results in an excise tax of 50% of the required distribution for the year to the participant.
Why is it important for Plan Sponsors to Understand RMDs?
There are many rules surrounding required minimum distributions that may affect employees depending on their ownership status within a company. For example, if an employee is still actively employed by a firm when they reach 70 ½ , they can delay taking a distribution from the plan. However, if that employee has greater than 5% ownership in the company that sponsors the retirement plan, the employee must take an RMD from that plan regardless if they worked full time during the year.
Other RMD Considerations
Plan sponsors need to make sure all participant contact information is up to date. The Department of Labor recently published guidelines for making reasonable efforts to contact missing participants and have been enforcing those guidelines.
Innovative Investment Fiduciaries specializes in advising on qualified retirement plans. We assist plan sponsors in the selection of recordkeepers and third-party administrators to ensure that all services and processes, including RMD notification and processing, will be handled in an efficient manner that suits the plan sponsor’s needs. If you have any questions about your plan, contact Innovative here.
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