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401(k) Required Minimum Distributions – What You Need to Know Blog Feature
Eric Droblyen

By: Eric Droblyen on November 15th, 2017

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401(k) Required Minimum Distributions – What You Need to Know

Retirement Planning

We’re fast approaching the end of another calendar year, and for many older Americans, that means it’s time to take a Required Minimum Distribution (RMD) from their 401(k) account. If you participate in a 401(k) plan, you want to understand the RMD rules. Failing to take a RMD can mean stiff tax penalties from the IRS. Understanding the RMD rules can also help you avoid required distributions altogether.

The RMD rules for 401(k) plans can get complicated, but below are some of the basics. If you need more specific information, refer to your plan’s Summary Plan Description (SPD). If you have RMD questions after that, talk to your accountant or 401(k) provider.

What’s a RMD?

A RMD is the minimum amount that must be distributed to you from your 401(k) account each year starting with the year you turn age 70 ½. However, you can delay your first RMD until the year you retire if you do not have a 5% or more ownership stake in your employer (i.e., the 401(k) sponsor).

What is the deadline for taking a RMD?

Your first RMD can be delayed until the April 1 following the year in which you turn 70½. For all subsequent years, you must take the RMD by December 31 of that year.

How is a RMD amount calculated?

A RMD for a year is calculated by dividing the market value of your 401(k) account - as of December 31 of the prior year - by a life expectancy factor. To estimate your RMDs in retirement, you can use an online RMD calculator.

How are RMDs calculated for multiple 401(k) accounts?

If you have more than one 401(k) account, you must calculate and satisfy your RMDs separately for each account.


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Are Roth 401(k) accounts subject to the same RMD rules as pre-tax 401(k) accounts?

Yes. Roth 401(k) accounts are subject to the same rules – they’re just not taxable.

Can RMDs be rolled over?

No. RMDs from your 401(k) cannot be rolled to another 401(k) plan or IRA. You must take RMDs as cash.

How are RMDs taxed?

The taxable portion of a RMD is subject to Federal taxation at ordinary income rates. RMDs may also be subject to state and local taxes.

Because they are not rollover-eligible, RMDs are not subject to mandatory 20% tax withholding at distribution time. Instead, they are subject to 10% withholding unless you elect a different %.

Is it possible to take more than the RMD amount?

Yes, if you are eligible to take a different type of distribution from your 401(k) plan. Unlike RMDs, most non-RMD distributions are rollover-eligible.

What is the penalty for not taking a RMD timely?

If you fail to take a RMD by the applicable deadline, the shortfall will be subject to a 50% IRS excise tax.

Can the penalty for missed RMDs be waived?

Yes. You can have the 50% excise tax waived by the IRS by establishing the RMD shortfall was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. To qualify for this relief, you must file Form 5329 and attach a letter of explanation.

Can RMDs be avoided?

It’s possible. Unlike 401(k)s, Roth IRAs are not subject to RMDs until after you die. That means you can rollover your 401(k) account – paying taxes on the pre-tax portion - to a Roth IRA to avoid RMDs at age 70 ½. However, to avoid a year’s RMD, you must complete your rollover before the preceding December 31.

For this strategy to work, your 401(k) account must be eligible for a distribution.

Not understanding the RMD rules can be costly and frustrating!

Generally, a good 401(k) provider will calculate RMD amounts for you, but it’s ultimately your responsibility to ensure your RMDs are timely distributed – which is why the IRS penalizes you for shortfalls.  That said, you want to understand the RMD rules to stay out of trouble.  This knowledge might also help you avoid RMDs altogether!


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About Eric Droblyen

Eric Droblyen began his career as an ERISA compliance specialist with Charles Schwab in the mid-1990s. His keen grasp on 401k plan administration and compliance matters has made Eric a sought after speaker. He has delivered presentations at a number of events, including the American Society of Pension Professionals and Actuaries (ASPPA) Annual Conference. As President and CEO of Employee Fiduciary, Eric is responsible for all aspects of the company’s operations and service delivery.

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