RMDs—how to take them and any other
“We send a first-year notification
letter at the beginning of the year, notifying
them that they will have to take RMDs
soon, as well as a worksheet dictating their
election options and Q&A documentation
explaining RMDs,” Driscoll says. “Every
year, we also send an RMD advice letter to
employees who are still employed past 70
1/2, informing them that they may have to
start taking RMDs if they separate from
Driscoll notes, “For participants who
don’t take action and initiate a withdrawal,
we have an RMD auto-generation feature.
And, at the end of the year, we’ll create the
distribution and send them a notice with
the required amount. We’ll process the
distribution on their behalf and generate
all the relevant tax reporting and notices.”
Are There Exceptions?
Unless participants own 5% or more of
the business sponsoring their retirement
plan, they may, as noted earlier, delay
taking RMDs from their 401(k) or 403(b)
plan past age 70 1/2, until they retire.
Accountholders of Roth 401(k)s and/or
Roth IRAs are not required to take RMDs
on those funds, as taxes have already been
paid. However, the pertinent RMD rules
will apply for a sole beneficiary.
How Do RMDs
Apply to Beneficiaries?
According to the IRS, beneficiaries of
employer retirement accounts—IRAs,
as well—calculate RMDs using the
Single Life Table. This can be accessed
when using Form 590-B, by referring to
Table I, Appendix B: Distributions From
Individual Retirement Arrangements.
The table shows a life expectancy based
on the beneficiary’s age. The account
balance is divided by this life expectancy
to determine the first RMD. The life
expectancy is reduced by one year for each
Beneficiaries must take an RMD
for the year of the accountholder’s death,
using the RMD that person would have
• The IRS RMD rules govern mandatory, annual withdrawals that
participants of 401(k), 403(b) and profit-sharing plans generally must
make when they turn 70 1/2 years old and are no longer employed
or when they work past that age then retire.
• For each 401(k) account, an RMD can be calculated by dividing the
account balance, as of December 31 the year before the one in which
the RMD is taken, by an applicable life expectancy factor on the IRS’
Uniform Lifetime Table.
• It is important that plan sponsors and recordkeepers keep track of
the correct contact information for terminated, active participants,
especially those near 70 1/2 or older.
received. The following year, the RMD
will be calculated according to the particulars of the beneficiary.
Thus, it is important for plan sponsors and recordkeepers to clearly communicate the specific implications of RMDs
to beneficiaries, who may be less engaged
with the retirement account than the original holder was.
Not Taking an RMD
Participants who fail to take RMDs when
required can face a 50% excise tax based
on the amount that should have been
withdrawn. Plan sponsors should maintain frequent contact with participants
close to needing to take their first RMD.
However, this penalty can be challenged. “The IRS recognizes that some
individuals may have good reason that
they didn’t take out an RMD,” says attorney
Deborah L. Grace, with Dickinson Wright
in Detroit. “So individuals can file Form
5329 and request a waiver of the penalty.”
Forgiveness of the penalty would be
determined on a case by case basis. “It’s
always better for the participant to discover
it and reach out to the IRS than the IRS
figuring it out in an audit,” Driscoll says.
“My understanding is they will be a little
more lenient in that case.”
What About Annuities?
Annuities may be treated differently under
RMD rules. For example, says Driscoll,
under those rules, a 401(k) plan may permit
participants to use up to 25% of their
account balance, or $125,000, whichever
is less, to purchase a qualified longevity
annuity contract [QLAC], but it will not be
included in the RMD calculation.”
As a general rule, qualified contracts
such as those held in individual retire-
ment accounts (IRAs) are subject to the
same RMD rules as other qualified retire-
ment investments. However, nonqualified
contracts are based on after-tax deferrals.
So, they typically do not require with-
drawals until annuitization, as is defined
by the annuity’s contract.
Things That May Get
As all participants responsible to take
RMDs from their 401(k) must do so from
each account they hold, plan sponsors
need to keep track of former employees
who still have assets in the plan.
Sponsors should also point out the
need to cash RMD checks, which may
be mailed to retired participants. Letting
these sit uncashed can technically put a
participant in violation of RMD requirements.
“Plan sponsors share the responsibility with their participants from a fiduciary or administrative perspective in
making sure participants are satisfying
their requirements,” Driscoll concludes.