By allowing participants to contribute pre-tax dollars, qualified retirement plans are a great vehicle for deferring income tax. However, participants are not allowed to defer this income tax forever; at some point they are required to withdraw this money from their account and pay income tax on it. This is called a required minimum distribution, or RMD.
When is an individual required to take their first distribution from the plan?
The first RMD must occur no later than the April 1st following the end of the calendar year in which the individual turns 72 years old. In subsequent years, distributions must be made annually not later than December 31st. Thus, for a DC plan (or a DB plan paying out the entire benefit) there will be two RMDs in year one, one in April for the prior year RMD (if not already paid) and one in December for the current year RMD. For a DB plan not paying out the entire benefit, the RMD is paid as an annuity (not longer than the employee’s or beneficiary’s lifetime), with only the payment in April required.
Note: Prior to the passage of the SECURE Act in December of 2019, RMDs were triggered at age 70½ instead of 72. As a result, only individuals born after 6/30/1949 are eligible for the age 72 RMD threshold.
Are there any exceptions?
Yes. If a participant is still employed at 72 years of age and is not at least a 5% owner of the plan sponsor, then they are not required to take a RMD until they terminate employment. If the individual owns 5% or more of the plan sponsor, they are required to take their RMD on or before the April 1st following the end of the calendar year in which they turn 72 years old.
How much money is required to be distributed?
This is dependent upon the individual’s age, the age of their spouse and their account balance. The retirement plan professional will calculate the dollar amount and alert the plan sponsor.
What happens if the RMD is not taken?
The penalty for missing a RMD is steep. The individual will be taxed 50% of the amount that should have been distributed. To avoid this penalty, Pinnacle Plan Design continuously tracks upcoming RMDs and notifies plan sponsors when one is approaching for a participant.
Can one just increase the amount of their RMD from their IRAs?
No. Balances in qualified retirement plans cannot be combined with IRA balances for purposes of determining RMD amounts. Each qualified retirement plan stands on its own for this purpose.
Contact Pinnacle Plan Design
Pinnacle Plan Design is a third-party administrator (TPA) for employer-sponsored qualified retirement plans. We specialize in retirement plan design, administration and actuarial consulting for 401(k)/profit-sharing plans, defined benefit plans, cash balance plans, and 403(b) plans. Pinnacle Plan Design proudly serves businesses nationwide.