What are Required Minimum Distributions?
Required Minimum Distributions (RMDs) are minimum payments that must be made to participants in qualified plans and to owners of IRAs on an annual basis after an individual has attained a certain age.
When must RMDs begin in a qualified retirement plan?
In general, RMDs must begin no later than April 1st following the calendar year in which the participant attains age 70 ½ or retires.
RMDs must commence, however, for “5-percent” owners no later than April 1st following the calendar year in which the participant attains age 70 ½ even if the owner is still actively employed.
A plan may, but is not required to, require RMDs begin for all participants (owners and non-owners) no later than April 1st following the calendar year in which the participant attains age 70 ½ (but most plans don’t).
For example, a non-owner participant turns 70 ½ on July 1, 2018 and retires on July 31, 2018. His first RMD is due for 2018 but may be made as late as April 1, 2019. If he elects to take his first RMD in 2019, then he will be required to receive two RMDs in 2019 (one for the 2018 calendar year and one for 2019).
What is a “5-percent” owner?
Generally, a “5-percent owner” is any individual who owns more than a 5% interest in the company, and certain family members of 5-percent owners.
Do the same rules apply to IRAs?
Not exactly; the exception discussed above for non-owners does not apply to traditional IRAs. RMDs must commence no later than April 1st following the calendar year in which the IRA owner attains age 70 ½.
Note: Roth IRAs are not subject to the RMD rules until after the death of the IRA owner.
What is the due date for RMDs?
After the first year (when the distribution must be made by the following April 1st), RMDs from a defined contribution or 401(k) plan must be made each year by December 31st. For a defined benefit plan, including cash balance plans, the RMD must be calculated and distributed as of April 1steach year.
Note:It is important to remember that most plan recordkeepers and IRA custodians need time to process distributions. A good third party administrator will make sure the plan sponsor is aware of any RMDs that must be made so that they can be issued in a timely manner.
For IRAs, the owner should make sure he or she communicates with his or her IRA custodian so that there is ample time to process the necessary distribution.