Required Distributions from Retirement Plans
In general, the minimum required distribution rules specify the latest permissible date for plan distributions to begin and the maximum time period over which they may be made. Their purpose is to ensure that retirement plans are used to provide retirement benefits rather than as mechanisms for the indefinite deferral of tax. Failure to make minimum required distributions results in an excise tax on the payee (i.e., plan participant) of 50% of the amount by which the required distribution exceeds the amount actually distributed during the year.
In general, distributions to a participant in a retirement plan must begin by the required beginning date and must be paid over:
- the life of the employee;
- the lives of the employee and a designated beneficiary; or
- a period, which may be a term certain, that cannot exceed (a) the life expectancy of the employee or (b) the life expectancy of the employee and a designated beneficiary.
The “required beginning date” of a participant (other than a 5% owner) is April 1st of the calendar year following the calendar year in which the employee reaches age 701/2 or retires, whichever is later. However, the required beginning date for a 5% owner is April 1 of the calendar year following the year in which the 5% owner reaches age 701/2, even if not retired. Before the required beginning date, you need not be concerned with the operation of the minimum required distribution rules. As much or as little as desired can be distributed under the plan’s terms.
There are a few unique rules to be aware of. For example, when an investor has multiple IRA accounts the RMD is a cumulative amount and can be satisfied from one account or from multiple. If an investor also has a 401(k) however a distribution must be taken from the 401(k) separately. There are also specific rules and considerations for account owners and non-spouse beneficiaries the year an account owner dies and subsequent years after.
For additional information or to schedule a consultation to review your specific situation contact us at 440-617-6697.