The Internal Revenue Service requires withdrawals from qualified retirement accounts in most cases after a plan participant reaches age 70 1/2. The exact amount, called the required minimum distribution, or RMD, depends on the age of the account owner and other factors. When the original owner dies, the beneficiaries must follow similar laws for required distributions. Because these laws turn retirement savings into taxable income, errors can result in expensive IRS penalties.
All types of employer-sponsored retirement plans come under RMD requirements. These include 401k, 403b, profit-sharing and 457b retirement accounts. In addition, regular IRAs, SIMPLE IRAs, SEP IRAs, SARSEPs and Roth 401k accounts fall under the mandate. However, required distribution rules apply only after the owner's death to Roth IRA accounts.
The IRS permits some plan participants still working after age 70 1/2 to postpone RMDs until they actually retire. However, if you have more than 5 percent ownership percent of the company sponsoring the retirement plan, you can't postpone RMDs by continuing to work. In addition, the IRS does not allow postponements for individual retirement accounts.
The IRS requires you to start taking annual distributions for the year you turn age 70 1/2. However, you can wait until April 1 of the year after your 70 1/2 milestone to take the first RMD. For subsequent years, you have only until December 31 to take each year's distribution. If you postpone the first year's distribution until April of the next year, you still must take the second one by December 31 of the same year.
The IRS holds the account owner completely responsible for making minimum withdrawals even if plan administrators calculate amounts. The percentage varies and depends on whether the owner is a plan participant or beneficiary. IRS worksheets and tables in Publication 590 help with calculations. The Joint and Last Survivor Table applies for a plan owner whose only beneficiary, a spouse, is more than 10 years younger. A plan owner with a spouse closer in age or more beneficiaries uses the Uniform Lifetime Table. The Single Life Expectancy Table provides the rates for beneficiaries.
If you have multiple retirement accounts, first compute the RMD for each individual account. If you have several IRAs or several 403b plans, add up the total and take it all from the account or accounts of your choice. The IRS only requires you to withdraw the correct total in these two instances. In all other cases, including 401k or 457b accounts, you must take the correct percentage from each individual account.
Taxes and Penalties
The IRS taxes RMDs at your normal income tax rate. You are allowed to withdraw additional amounts, also subject to taxes. Only money you have already paid taxes on is exempt -- for example, a distribution from a Roth IRA. You cannot roll over an RMD into another retirement account and thereby avoid taxes. The penalty for not withdrawing a sufficient amount is 50 percent of the deficiency. However, the IRS may waive the penalty if you correct the error and show reasonable cause. Request a waiver by submitting IRS Form 5329 with a letter of explanation.
- Internal Revenue Service: Publication 590 (2011), Individual Retirement Arrangements
- Internal Revenue Service: Required Minimum Distribution Worksheets
- Internal Revenue Service: Form 5329 Additional Taxes on Qualified Plans
- Internal Revenue Service: RMD Comparison Chart (IRAs vs. Defined Contribution Plans)
- Thinkstock/Comstock/Getty Images