Required minimum distributions (RMDs) are the minimum amounts you’re required to pull from your retirement accounts each year. The RMD rules apply to the following types of retirement plans:
- Employer-sponsored retirement plans like 401(k)s, 403(b)s, and 457(b)s
- Traditional IRAs
- IRA-based plans like SEPs and SIMPLEs
RMDs typically aren’t required for ROTH IRAs while the owner is still alive but may be required for beneficiaries of ROTH plans.
When should participants begin taking RMDs?
Retirees should take their first RMD by April 1st of the year they turn 73. If they’re still employed, they can delay taking RMDs until they retire unless they own 5% or more of the business that’s sponsoring the plan.
How are RMDs calculated?
RMDs vary based on type of account, account value, and the participant’s life expectancy. Most employer-sponsored plans calculate RMDs for their participants, but ultimately, it’s the responsibility of each participant to comply. The IRS calculates RMDs using tables that can be found on their website.
Do participants have to take RMDs from each retirement account separately?
Individuals with more than one retirement account should calculate RMDs for each account separately. However, if they have more than one account of the same type, they can take the sum total of their RMDs from just one. Let’s look at an example.
Julie has two 401(k)s and one 403(b). Her 401(k) RMDs are $10,000 and $13,000, and her 403(b) RMD is $2,000. She can take the sum of her 401(k) RMDs ($23,000) from either of her 401(k) accounts but not from her 403(b). Similarly, she can only take her $2,000 RMD from her 403(b), but not from either of her 401(k)s.
What happens if retirement account owners don’t take their RMDs?
Account owners who don’t take required withdrawals will be assessed a 25% penalty of the shortfall. If they can remedy the mistake within two years, that penalty will typically drop to only 10%. This penalty structure is new in 2023; prior to the passage of the SECURE Act 2.0, the penalty was a whopping 50% of the shortfall.
What should plan administrators be doing to help participants?
Plan administrators can help their participants prepare for RMDs in a few ways.
- Notify participants when they reach RMD age.
- Educate participants about RMDs, especially those nearing or at retirement age.
- Send reminders to RMD-eligible participants to make withdrawals by year end.
Plan administrators can also perform a few housekeeping tasks to make plan management a bit less burdensome. For example, if you proactively update your participants’ contact information, you can more easily fulfill plan notification requirements.
It’s also important for you to keep accurate participant headcounts. On the first day of the plan year, if you have more than 100 participants, the plan is considered to be a “large plan filer” for that year. Large plan filers are subjected to additional compliance and reporting requirements, including:
- Having an independent CPA audit their plan’s financial statements.
- Filing the full version of Form 5500.
Beginning in 2023, the only participants you should consider for this 100-participant threshold are those with account balances. In 2022 and prior years, you were required to count (1) all current employees who were eligible for the plan, regardless of if they chose to participate, plus (2) all former employees with account balances. This change helps more businesses stay below this 100-participant threshold.
A retirement plan’s status is determined each year, so if your plan is nearing that 100-participant threshold, keep a close eye on it. Plan sponsors can actively review and roll former participants out of their plan, so their balances do not count towards the total employee counts.
For more information about required minimum distributions, contact us today.
