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 The required minimum distribution (RMD) rules limit the extent to which an individual can use the tax deferral of a qualified retirement plan.
RMD rules dictate when distributions must be made from the retirement plans of certain taxpayers.
The rules apply to all qualified retirement plans, including traditional IRAs and 401(k)s. But the rules that apply to 401(k)s are a little different from the rules that apply to IRAs.
The rationale behind the RMD rules is that Congress provided the tax benefits of IRAs and other qualified retirement plans to help individuals save for retirement, but the benefits are to be used primarily for the original account owner's retirement.
They aren't to be used as estate planning tools, to accumulate wealth protected from income taxes, or to transfer wealth to other individuals.
The required minimum distribution rules are established in Internal Revenue Code §409(a). But the tax code section isn't very specific. The details of the RMD rules are in the IRS regulations issued under §409(a).
The penalty is 50% of the amount that should have been distributed from the plan but wasn't.
The penalty is in addition to any income taxes due on the distribution. The penalty might be waived if the account owner qualifies for one of the exceptions and files Form 5329 with the IRS requesting a waiver of the penalty.
How Does a 401(k) Work?
A 401(k) is a tax-deferred, employer-sponsored retirement account that is offered by companies to its employees.
The plans are named after the section of the Internal Revenue Code that authorizes them.
The employer decides and whether and to what extent to match employee contributions.
The amounts both employers and employees can contribute to the plan are limited by the tax code and change annually.
There are two types of 401(k)s: traditional and Roth.
Deferrals to traditional 401(k)s are made with pre-tax income, which means the amounts deferred to the 401(k) accounts are not included in the employee's gross income for income tax purposes that year (though the deferrals are included in gross income when Social Security and Medicare payroll taxes are calculated).
Deferrals to Roth 401(k)s are made with after-tax income.
The deferred amounts are included in the employee's gross income for income tax purposes, and the employee must use other resources to pay income taxes on that income.
The Required Minimum Distribution for a 401(k)
Although this article specifically discusses a 401(k) plans, the rules apply to similar employer-sponsored retirement plans, including profit-sharing plans, 403(b) plans and 457(b) plans.
For individuals who turned age 70½ after 2019, the first RMD must be taken by April 1 of the year after the individual turned 72.
But the RMD really is for the year in which the individual turned 72. Subsequent IRAs must be taken by December 31 of each year after the year in which the individual turned 72.
There's an exception for 401(k) accounts:
If the account owner still is working for the employer who sponsors the 401(k) plan and the account owner does not own 5% or more of the employer, then the employee can delay the RMDs without penalty.
The RMDs can be delayed until the individual no longer is working for the employer.
Note that the RMDs are delayed only for the 401(k) accounts sponsored by the employer for which the individual is working after age 72.
RMDs must be taken from any 401(k) accounts the individual holds in other employer's plans.
The calculation of the required minimum distribution for a 401(k) is quite simple.
There are three steps to the calculation: - Determine the account's balance as of December 31 of the previous year.
- Determine the applicable life expectancy factor from life expectancy tables issued by the IRS and published in IRS Publication 590-B.
- Divide the account balance by the life expectancy factor. The result is the RMD amount for the year.
If an account owner has more than one 401(k) account, the required minimum distribution amount must be computed and taken separately from each account.
Unlike traditional IRAs, the RMDs cannot be aggregated and then taken from the different accounts in any proportion the account owner selects. | | | Never mind all the inflation talk...
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To learn all about these new findings, click the link below. CLICK HERE... | | | Do 401(k)s Have Required Minimum Distributions? Key Takeaways: - The required minimum distribution is the minimum amount of money that must be distributed from a qualified retirement plan account, usually after the employee reaches age 72.
- A 401(k) is an employer-sponsored qualified retirement plan that allows employees to defer part of their paychecks to accounts. The employer can elect to match some or all of the employee contributions up to limits established in the tax law.
- The calculation of the required minimum distribution involves three simple steps.
- Required minimum distribution must be taken separately from each 401(k) that is owned.
- The required minimum distribution can be delayed after age 72 as long as the employee still is working for the employer that sponsors the plan.
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Bob Carlson
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 Robert C. Carlson is the author of the books The New Rules of Retirement and Retirement Tax Guide, editor and investment director of the popular retirement newsletter, Retirement Watch, and editor of the free weekly e-letter, Retirement Watch Weekly. Bob is a frequent speaker at investment conferences around the country, and you can also hear Bob as a featured guest on nationally-syndicated radio shows, such as The Retirement Hour, Dateline Washington, Family News in Focus, The Michael Reagan Show, Money Matters and The Stock Doctor. | | | | | |
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