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

Brian Furgala

March 29, 2023

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Table Of Contents

Take your money or else! A required minimum distribution (RMD) is the amount you must withdraw from certain retirement accounts annually after a certain age.  The government created the RMD rules to ensure retirement accounts are not used as estate planning vehicles solely to transfer money to beneficiaries upon death. If you participate in a 401(k) plan, you want to understand these rules. Failing to take an RMD can mean tax penalties from the IRS. 

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. 

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The “Required Part of RMDs

An RMD must be distributed to you from your 401(k) account each year after you reach a certain age. However, if you are still working when you reach that age, the plan may allow you to wait until retirement to begin RMDs. 

RMD Age or Retirement

The age at which you must begin RMDs depends upon the year you were born. 

Birth Year 

RMD Age 

Born before 7/1/49 

70 ½ 

Born after 6/30/49 and before 1/1/51  

72 

Born in 1951 through 1959 

73 

Born after 1959 

75 

However, you may be able to delay your first RMD beyond this RMD age if you are still working for the employer who sponsors the 401(k) plan. This potential delay is permitted for all employees who do not own more than 5% of the business. If you own more than 5% of the business, then you must begin RMDs at your RMD age. 

Suppose that Scarlett was born in 1950 and continues to work for the employer who sponsors her 401(k) plan. The plan allows the delay of RMDs until retirement, and she does not own more than 5% of the business. Although Scarlett’s RMD age of 72 occurred in 2022, she does not have to receive an RMD until she decides to retire. 

Refer to your plan’s Summary Plan Description (SPD) or check with your employer to see if this option is available. 

Loophole For Those Born in 1951

The law in effect on December 28, 2022, required individuals born in 1951 to begin RMDs when they reach age 72 (in 2023). These individuals were likely preparing for their first RMD and may have received a notice about it upcoming. However, the law changed on December 29th so that individuals born in 1951 didn’t need to begin RMDs until they reached age 73 (in 2024). Therefore, those born in 1951 get one more year before they have to worry about RMDs! 

RMD Deadline

Generally, you must receive the RMD by December 31 of the applicable year. However, your first RMD can be delayed until April 1 following the year in which the later of:

  1. you reach RMD age; or
  2. retire (if permitted by the plan and you are not a 5% owner). 

Going back to Scarlett, who was born in 1950, meaning her RMD age is 72, and she no longer works for that employer. Her first RMD (for 2022) must be received by April 1, 2023. Scarlett’s second RMD (for 2023) must be received by December 31, 2023, and each subsequent RMD is due by the following December 31st.

If Scarlett was still working for the employer who sponsors her 401(k) plan, her RMDs could be delayed until retirement. If Scarlett continued working for her employer until 2027, her first RMD (for 2027) must be received by April 1, 2028. Her second RMD (for 2028) must be received by December 31, 2028, and each subsequent RMD is due by the following December 31st. 

RMDs Upon Death

Whether you have reached RMD age or not, RMDs must still be paid from your 401(k) account upon your death. Your beneficiaries generally have ten years to receive the full amount of your 401(k) account. Certain beneficiaries, such as your spouse or minor children, may be able to stretch the RMD payments beyond 10 years. Refer to your plan’s Summary Plan Description (SPD) or check with your employer for more information about the payment of death benefits. 

The “Minimum” Part of RMDs

An RMD is the minimum amount that must be distributed to you from your 401(k) account based on a life expectancy factor. 

Life Expectancy Factor

An RMD for a particular 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. The life expectancy factors were recently updated in recognition that people are living longer. Below are the life expectancy factors for ages 72-76 if you are single or married and your spouse is no more than ten years younger. All life expectancy tables can be found in the IRS Publication 590-B. 

Age 

Life Expectancy Factor 

72 

27.4 

73 

26.5 

74 

25.5 

75 

24.6 

76 

23.7 

Returning to Scarlett (born in 1950 and are no longer working for the employer who sponsors the 401(k) plan), below are her hypothetical RMD amounts for 2022, 2023, and 2024 and when they would be due. 
 
  2022 2023 2024
RMD Age 72 73 74
Life Expectancy 27.4 26.5  25.5 
Balance at Previous Year-End

$100,000.00 on

12/31/2021

$102,000.00 on 
12/31/2022

$96,000.00 on 

12/31/2023

Total RMD Amount $3,649.64 $3,849.06  $3,764.71
Due Date 4/1/2023  12/31/2023  12/31/2024 

Is it possible to take more than the minimum amount in a specific year?

Yes. If you have reached RMD age or you have retired, it is likely that you are allowed to take distributions from your 401(k) account. If so, then you should be able to take more than the minimum amount as a distribution. There may be limitations on whether a full or partial distribution is permitted, so you should refer to your plan’s Summary Plan Description (SPD) or check with your employer to verify distribution options or limitations. 

If you do take more than the minimum amount (but less than your full 401(k) balance), the RMD calculation for future years is not impacted. In other words, taking more than the minimum amount will not result in you being able to skip a year or more of RMDs.  

The “Distribution” Part of RMDs

RMDs are treated similar to other distributions from a 401(k) plan, but there are some differences. 

RMDs Ineligible for Rollover

RMDs from your 401(k) account cannot be rolled to another 401(k) plan or IRA. You must take RMDs as cash. On the other hand, distributions above the RMD minimum amount are eligible for rollover. 

RMD Taxation

Similar to other distributions from 401(k) plans, an RMD is subject to federal taxation at ordinary income rates. RMDs may also be subject to state and local taxes.

Because they are not eligible for rollover, RMDs are not subject to mandatory 20% tax withholding at distribution time. Instead, they are subject to 10% withholding unless you elect a different percentage, including no withholding at all. 

RMDs and Roth 401(k) Accounts

Starting for the 2024 RMDs, Roth 401(k) accounts are not subject to same RMD rules. Prior to the 2024 RMDs, Roth 401(k) accounts are subject to the same rules – they’re just not taxable. 

Going back to Scarlett one more time, if her 401(k) account was all Roth, the hypothetical 2022 RMD of $3,649.64 and 2023 RMD of $3,849.06 would still need to be timely paid, but would not be taxable income. In contrast to the table above, Scarlett would not have a 2024 RMD due because of the Roth status of the 401(k) account ($96,000 as of December 31, 2023). Starting in 2024, an RMD for a Roth 401(k) account is not required until after the death of the participant. 

Calculating RMDs for Multiple 401(k) Accounts

If you have more than one 401(k) account, you must calculate and satisfy your RMDs separately for each 401(k) account. This is different than IRAs which allow you to aggregate all IRA balances to determine the RMD and then take that total RMD from just one IRA if desired. 

RMD Failures

A good 401(k) provider will notify you and calculate your RMD amounts. Be on the lookout for notifications from your 401(k) provider when you are getting close to RMD age. Even if you fail to respond, your 401(k) provider will typically send the RMD amount to you. 

However, it’s ultimately your responsibility to ensure your RMDs are timely distributed – which is why the IRS penalizes you for shortfalls. 

Penalty for Not Taking an RMD Timely

If you fail to take an RMD by the applicable deadline, the shortfall will be subject to a 25% IRS excise tax. The IRS excise tax is reduced to 10% if the failure is detected and RMD is received prior to the IRS notifying you of the failure. 

Potential Waiver of Penalty

Prior to a recent law change, the IRS considered waiving the excise tax by establishing the RMD shortfall was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. However, the IRS waiver existed when the excise tax was 50%. Now that the excise tax has been reduced to 25% (10% if completed before IRS notification), the IRS has not released guidance on whether it will accept applications for waiving the excise tax. 

Avoiding RMDs Altogether

It’s possible to avoid RMDs altogether by converting to Roth. Roth 401(k) accounts starting in 2024 are not subject to RMDs until after you die. That means you can avoid RMDs by contributing Roth elective deferrals and converting employer contributions to Roth. Please note that taxes on those elective deferrals and any converted employer contributions will be due in that tax year.

If your 401(k) plan doesn’t allow for a Roth account, then you can roll over your 401(k) account – paying taxes on the pre-tax portion - to a Roth IRA to avoid RMDs. For this strategy to work, your 401(k) account must be eligible for a distribution. To avoid an RMD in a specific year, you must complete your rollover before the preceding December 31st.

Not Understanding the RMD Rules Can be Costly and Frustrating!

Understanding the RMD rules can keep you out of trouble or help you potentially avoid RMDs altogether. You’ve worked hard to save for retirement. Don’t give it to the government through tax penalties by failing to comply with the RMD rules! 

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