Thin(k) About Your Retirement: The Evolution of The Required Minimum Distribution

A Required Minimum Distributions (RMD) is an IRS mandated distribution from retirement plans such as 401(k), 403(b), 457(b) Plans and other qualified plans.  The rules around RMDs have evolved over the past few years.  Here is what you need to know as it relates to company sponsored defined contribution (DC) plans.  Key questions are:

When do I Start?

Currently, the initial RMD age is 73.  If you will turn 73 during the 2024 calendar year, it is time to begin thinking about your first RMD.  You must take your first RMD by April 1 of the year after you reach RMD age (with some exceptions). For every year after that, you'll have to take your RMD by December 31.  You should take your 2024 RMD by December 31, 2024 if you would like to avoid taking two RMDs in 2025.  Deferring the 2024 RMD means you must take both 2024 and 2025 RMDs in 2025.  Be sure to consult with your tax professional before making this decision.

If you are retired and reach RMD age, you will be required to take an RMD.  However, two exemptions apply.  First, you may not have to take an RMD if you are still working and do not own more than 5% of the business for which you work as long as the business’s DC plan allows you to defer the RMD until retirement.  Second, RMDs are no longer required for the portion of your 401(k), 403(b) or 457(b) account designated as Roth.  Failure to take an RMD could lead to hefty penalties, possibly as high a 25%.  Again, be sure to consult with your tax professional before making this decision.

How much is distributed?

The amount of your RMD will be calculated based upon the account value subject to RMD on December 31 of the prior year.  The IRS provides tables to make the calculation, and most DC recordkeeping companies will make the calculation for you.  With the exceptions mentioned above, you must take an RMD from each 401(k) or 457(b) account you own.  You may not aggregate to just one of these accounts.  However, you may aggregate your RMD across your 403(b) accounts if you have more than one. RMD rules continue to evolve in ways that can be beneficial to people saving for retirement.  However, the evolution has brought added complexity.  We recommend you consult with your financial advisor and your tax professional to make sure you make the right decision regarding your RMDs.

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