As we approach the end of the calendar year, it is important to be reminded about one frequently overlooked retirement plan requirement.  Upon attainment of age 72, certain participants of a tax-qualified retirement plan may be required by federal tax law to withdraw a minimum amount from such plan each year.  These mandatory distributions are known as “required minimum distributions” (“RMD(s)”).

Depending upon the terms of the specific retirement plan, RMDs must begin to be withdrawn by April 1 of the year following the later of: 1) the year you attain age 72; or 2) the year you retire, provided you are not a 5% or greater owner of the business.  For years after the initial RMD is made, the requisite RMD amount must be withdrawn by December 31 of each year.  This includes the calendar year after an individual attains age 72, even if the first RMD is withdrawn during that same year.  If an RMD is not withdrawn by the applicable deadline or is withdrawn in less than the full required amount, the amount not withdrawn is subject to a 50% excise tax.

The discussion above considers the current version of the rule which became effective on January 1, 2020 under the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act.  However, prior to the enactment of the SECURE Act, the age which triggered the potential need to begin to take an RMD was age 70-1/2.  This raises the question of how to treat an individual who turned 70-1/2 prior to 2020 but who had not yet attained 72 by 2020.  With respect to those individuals, employees who turned 70-1/2 in 2019 or earlier cannot take advantage of this rule change and, if required, must receive their annual RMDs even if they have not yet attained age 72 in 2020.

An RMD amount is calculated by dividing the value of the retirement account of the affected individual as of December 31 of the immediately preceding calendar year by a life expectancy factor  prescribed by certain IRS Tables.  There are three different tables that could be employed.  The Joint and Last Survivor Table is used if the sole beneficiary of the account is a surviving spouse and the spouse is more than 10 years younger than the participant.  The Uniform Lifetime Table is utilized if the surviving  spouse is not the sole beneficiary or is not more than 10 years younger than the participant.  Finally, the Single Life Expectancy Table is used in certain circumstances by a beneficiary if the participant  has died.

Here is an example using the Uniform Lifetime Table:

1. Account balance on December 31of the previous year                                        $55,000
2. Appropriate value from Uniform Lifetime table (age 79)                                        19.5
3. Line 1 divided by number entered on line 2 = your RMD for this year           $2,820.51

We hope that this article helped you to better understand this topic.  However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such.  If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.