Sponsors need to know the required minimum distribution rules
Art by Riikka Laakso
Required minimum distributions (RMDs) are mandatory, annual withdrawals that participants
must take when they turn 70 1/2 years
old and are no longer employed or when
they work past that age then retire. These
Internal Revenue Service (IRS) rules
apply to holders of 401(k), 403(b) and
profit-sharing plans, as well as individual
retirement accounts (IRAs), SEPs [simpli-fied employee pension plans] and SIMPLE
[savings incentive match plan for employ-ees] IRAs. For IRAs, SIMPLE IRAs and
SEPs, participants must take the RMD at
70 1/2, regardless of employment status.
Those qualifying to take their first
RMD must do so no later than April 1
the year after they pass this threshold.
Thereafter, participants must take them
annually, no later than December 31.
Participants may withdraw more
than their RMD each year or space out
partial payments. Like the required with-
drawal amount, the money will be taxed
as regular income based on an individual’s
federal income tax rate and any applicable
state and local taxes. However, partici-
pants have until the applicable deadline to
take the full RMD for the year.
“Any withdrawals participants take
throughout the course of the year will
count toward their RMD for that year,”
says Tim Driscoll, director, defined contri-
bution product management, at Fidelity
Investments in Boston. “If someone
doesn’t want to take his entire RMD in a
lump sum, he can spread his withdrawals
out for any given frequency that we can
For 401(k) plans, RMDs can be
calculated by dividing the balance of an
account as of December 31 the year prior
to the one in which the RMD is taken, by
an applicable life expectancy factor on the
Uniform Lifetime Table from the Internal
Revenue Service (IRS).
Driscoll says participants with
multiple 401(k)s must take an RMD from
each account. That is, they may not calcu-
late the RMD for each account, combine
them and then withdrawal that sum
from a single 401(k). The IRS limits this
method to only certain types of plans,
Where such pooling is allowed, only
accounts from the same type of plan may
be considered together—not, for example,
a 403(b) account plus a traditional IRA.
If a participant’s spouse is 10 or more
years younger than the participant and is
the sole beneficiary, the participant may
use the IRS’ Joint Life and Last Survivor
Expectancy table to determine the RMD.
While these calculations can be
tricky for many, some recordkeepers offer
participants tools and services to help
them determine their RMDs, while also
guiding them through the withdrawal
Can Recordkeepers Help?
First, it is important to make sure plan
sponsors and recordkeepers keep track of
the correct contact information for participants, especially those approaching or
past age 70 1/2.
Driscoll says his firm periodically
sends these participants notices via
traditional mail to remind them about