Required Minimum Distributions for Retirement Plans – Things You May Not be Aware of

by Jim Wagner, CPA and Andrew Rutherford | Team Member of the Tax Services Group

Are you retiring or turning 70 years young this year and have questions regarding required minimum distributions from your IRA or qualified retirement plan? If so, you will want to read this article that covers some unique issues pertaining to required minimum distributions.

“Required Minimum Distributions” (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 – years of age. Actually, the year in which a retired account owner reaches 70 – years of age you can elect to defer taking the RMD into income until April 1 of the following year; but beware that that will result in 2 year’s of RMDs falling into one taxable year.

If you are age 70 or more, are still working for the employer of the qualified retirement plan, and you are not a 5% or more shareholder, you may defer taking a RMD from that plan until you “retire”, as long as the plan language allows for the deferral. Reduced hours do not constitute retirement. You should check your employer’s plan language to make sure this is provided for. In this case, you may continue to make deferrals into the plan and must also receive employer matching contributions.

However, if the retirement plan account is an IRA or the account owner is a 5% or more owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70, regardless of whether he or she is retired.

The term retirement has not been clearly defined. The IRS has stated that “retirement” does not include a mere reduction in the number of hours that an employee works. The IRS concluded that regulations and a prior revenue ruling clarified that an employee is “retired” when he or she stops performing services for the employer.

An IRA owner must calculate the RMD separately for each IRA that he or she owns, but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns, but can take the total amount from one or more of the 403(b) contracts.

Adversely, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans have to be taken separately from each of those plan accounts.

The Tax Professionals at Greenwalt CPAs would be happy to assist you and answer your questions relating to Required Minimum Distributions (RMDs), including preparing income tax projections to see whether it makes since to group the first two RMDs into one taxable year.

Contact information:

Jim Wagoner, CPA | Partner, Director of Tax Services Group | jwagoner@greenwaltcpas.com | 317.260.4432

Andrew Rutherford | Tax Services Group | arutherford@greenwaltcpas.com | 317.260.4410