Required Minimum Distributions: An Adult Mathematics Story Problem

Required Minimum Distributions (RMDs) can be a headache for everyone: participants, plan sponsors, and administrators. They can feel like those story problems in school where train A leaves Chicago at 11:00 towards Philadelphia which is 32 miles away, moving 50 miles an hour, while train B leaves… but with real world consequences.

I am going to tackle a basic piece of the puzzle: who has to take an RMD and by when during the year. Consider it a New Year’s gift to all of the hardworking HR and benefits personnel who field questions like this all the time.

The IRS maintains a helpful list of frequently asked questions and worksheets to help individuals sort out these questions.

First, all retired retirement plan account owners[1] who have reached age 70 ½ must take an RMD. In other words, if the individual has not yet retired, no RMD is required unless one of the following applies.  If an individual is a 5% owner of the business which sponsors the plan, he or she must begin taking RMDs at 70 ½ even if he or she has not retired. Also, RMDs must be taken from Individual Retirement Arrangements (IRAs) regardless of whether the owner has retired or not.

Next, when does the withdrawal have to take place? This seems to trip people up. Many people know that the starting age is 70 ½ and that they have until the following April to make the withdrawal. This is true, for the first year. After the first year, the withdrawal must be made by December 31. Which means that for individuals who took advantage of the extra time to withdraw 2018’s RMD in March of this year, for example, they will have to make another withdrawal before Dec. 31, 2019.

I know all of this 70 ½ stuff is a bit hard to wrap your head around, let’s talk actual dates.

The amount that must be withdrawn is based upon the account balance at the end of the previous year (so Dec. 31, 2018 for the withdrawals in 2019) as well as the owner’s life expectancy. Older account owners, who therefore have a shorter life expectancy must take a larger portion of his or her balance. Different tables are used if the owner’s spouse is the sole beneficiary and is more than 10 years younger, or if the account is an inherited IRA.

The exact calculation can be found in the worksheet linked above. As an example: a 70-year-old person with an account balance of $100,000 would be required to withdraw approximately $3,650 for 2019 Similarly, a 97-year-old person with the same account balance would be required to withdraw $13,158.

If an individual fails to take part or all of the RMD on time, the amount not withdrawn is taxed at 50%. The penalty can be waived if the owner establishes that the shortfall was due to reasonable error and has taken reasonable steps to remedy the error.

Further detailed questions should be routed to an individual’s financial planner or tax professional.

Ultimately, the plan administrator is legally responsible for calculating RMDs from their plan(s) and ensuring the distributions are completed and missed RMDs can put the plan’s qualified status in jeopardy. Many plan sponsors at least partially delegate this function to their recordkeepers. If you are concerned participants are not receiving their RMDs from your plan, discuss RMD support services with your recordkeeper.

For more information, contact a Multnomah Group consultant.

Notes:

[1] This applies to the following retirement plan accounts: traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit sharing plans, other defined contribution plans

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.