Connections for Success



Helping Soon-to-Be Retirees Understand RMD Rules
James Pellino

Do you have employees who will soon reach retirement age? Many people are not aware of required minimum distribution (RMD) obligations beginning at age 70½ for both their individual IRAs and their 401(k) plans.  The IRS requires individuals to start taking distributions from certain retirement plans once the person reaches 70 ½.  It is important that they know what to expect when they reach that age, for financial and tax-planning purposes.

IRAs and 401(k)’s
To avoid a whopping 50% penalty, current employees must take RMDs from their IRAs on reaching age 70½. However, the first payment can be delayed until April 1 of the year following the year in which the employee turns 70½. However, they do not have to begin taking distributions from their 401(k)’s if they are still working.

Although the regulations do not define how many hours employees need to be working to postpone 401(k) RMDs, they must be doing legitimate work and receiving wages reported on a W-2 form. There is an exception to this rule for owners. Workers who own at least 5% of the company must begin taking RMDs from the 401(k) beginning at 70½, regardless of their work status.  Plan sponsors should closely monitor any participants who are coming up on the RMD age limit.  Plan sponsors have a responsibility to ensure that they distribute RMD’s to any participants required to take RMDs.

If an employee has multiple IRAs, it does not matter which one he or she takes RMDs from so long as the total amount reflects their aggregate IRA assets. In contrast, RMDs based on 401(k) plan assets must be taken specifically from the 401(k) plan account.

Sooner Rather than Later
The IRS prefers taxing income sooner rather than later. (Roth IRAs are not subject to RMD requirements because the money in them has already been taxed.) The IRS determines how RMD amounts change each year as the retiree ages, using a formula and life expectancy tables.

Other Pertinent Facts
Here are some additional RMD facts that you can share with employees approaching retirement:

  • Beneficiary Spouses
    Account holders who have a beneficiary spouse at least 10 years younger are subject to a different RMD formula that allows them to take out smaller amounts to preserve retirement assets for the younger spouse.
  • Tax Penalty
    The tax penalty for withdrawing less than the RMD amount is 50% of the portion that should have been withdrawn. Participants must pay the penalty first and then bring a refund case for the penalty.
  • Form of Distribution
    RMDs can be in cash or be taken in stock shares whose fair value is the same as the RMD amount. Although this can be administratively burdensome, participants can defer incurring brokerage commissions on securities they do not want to sell. And, their tax basis in the stock (for future capital gains liability calculation purposes) resets to the fair value of the securities when they are distributed.

Informed Participants
Remember, informed participants are happy participants. It is never too early to educate your soon-to-be retirees about their RMD obligations. Involve your benefits advisor to ensure you are providing the most current information.

For more information, contact Jim Pellino at [email protected], or call him at 312.670.7444. Visit to learn more about our Employee Benefit Plans Services.

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