What is a Required Minimum Distribution, or RMD?

All good things must come to an end, and that’s true with retirement plans, too. Well, your 401(k) doesn't really end; however, the IRS does require that individuals begin taking distributions from their retirement accounts by April 1 of the year after they turn age 72 if they were born after June 30, 1949, or at age 70 ½ if they were born before July 1, 1949.  Why?  Because the IRS wants to collect tax revenue on the money you have been saving and deferring taxes on while you were working.  All 401(k), 403(b) and 457(b) plans require payment of RMDs. Traditional IRAs, SIMPLE IRAs, and SEP IRAs also have RMDs. However, Roth IRAs are not governed by the RMD rules. 

The RMD rules have limited exceptions. If you are still working when you reach the age for your first RMD, you can delay taking the RMD until you are no longer working for that employer, unless you are a 5% owner or greater of the business maintaining the plan in which case you must begin taking your RMDs at your required age. That said, even if you are still working, you must take the RMDs from IRAs and any other retirement plans with previous employers.  If you roll over accounts from your previous employers to your current employer’s plan, you may be able to delay the RMD from that money source, too.

If you have Roth dollars in your workplace retirement plan, such as a 401(k), another option to reduce your RMDs could be to roll over the Roth 401(k) dollars to a Roth IRA. If Roth dollars are rolled into a Roth IRA, and both were established at least five years before the first withdrawal occurs, the Roth dollars in the Roth IRA will take on the rules of the Roth IRA and will not be subject to RMDs. Therefore, it’s always a good idea to have both your Roth IRA and Roth workplace retirement plan established five years prior to your first withdrawal date to avoid any withdrawal penalties.

When calculating your RMD, you must do so from each account, but if you have multiple IRA accounts, you may take the total amount of the RMDs from one IRA account.  This is also true of 403(b) accounts.  However, with 401(k) and 457(b) accounts, you must take the RMD from each account.

Vestwell has a general policy of lump-sum distributions for terminated employees. However, we do allow for annual RMD distributions. Vestwell will withhold a 10% Federal tax withholding (you may request a waiver). If you wish to initiate your RMD, you may follow the instructions from our article, “How to Request a 401(k) Withdrawal”. If you need further assistance, please get in touch with us at help@vestwell.com.

If you need help calculating your RMD, you may find helpful resources online, such as the IRS RMD worksheet on the IRS site. Vestwell does not guarantee the accuracy of these calculations, but they may be a good place to start. In addition, Vestwell may send annual reminders to prompt you to take your RMD; however, ultimately, it is up to you to take your annual RMD and ensure that you take the RMD from each retirement account you own.  

After the first year of taking a RMD, you must receive the required distribution for each year by December 31 of that year. If no distribution is made in the starting year, required distributions for two years must be made in the next year (one by April 1 and one by December 31). If you do not take your required minimum distributions, there are severe tax penalties. If you fail to withdraw the required minimum amount, you may have to pay a 50% excise tax on the amount that was not withdrawn. That is 50% of the difference between the required distribution and the actual distribution taken.

If the account holder dies, the regularly required minimum distribution must still be made during the year of the participant’s death. Following the year of death, adult non-spousal beneficiary(ies) generally must move the money to an Inherited IRA and deplete the account within 10 years. For spousal beneficiaries, the requirement of taking a RMD will depend on the age of the deceased and the age of the living spouse. You should consult a tax professional with any questions.