When it comes time to start withdrawing the money your employees have spent a lifetime accumulating in their retirement accounts, you want to ensure that they make the right decisions. One that the government makes for you is requiring that you withdraw at least some of your funds annually, depending on the account type.

This is known as a required minimum distribution, or RMD, and it must be taken from your non-Roth retirement accounts by April 1 of each year, starting the year after you turn age 70½.

An RMD is generally determined using uniform life expectancy tables that take into consideration the account owner's and/or account beneficiary's age and marital status, as well as their account balance(s) as of Dec. 31 of the year prior to the distribution year.

Here are some important considerations for those entering the distribution phase of their investing lives.

  • Employees can pick the accounts from which they want to withdraw. If you have more than one of the same type of retirement account, such as multiple traditional IRAs, you can either take individual RMDs from each account or aggregate your total account values and withdraw this amount from one account.
  • Two different types of accounts. If you own more than one type of account, such as an IRA and an employer-sponsored plan account, you'll need to calculate your RMD for both types of accounts separately and take the proper amount from each.
  • Deferral option: If employees are still employed at age 70½, they may be able to defer taking RMDs from the employer-sponsored plan until retirement. They will need to check with their employer, however.
  • Severe penalties: If an employee fails to take their full RMD, the IRS may assess an excise tax of up to 50% on the amount they should have withdrawn and they will have to take the distribution.
  • Taxes are still due upon withdrawal. Employees will probably face a full or partial tax bite for their distributions depending on whether their traditional IRA or 401(k) was funded with non-deductible contributions. Note also that the amount you are required to withdraw may bump them into a higher tax bracket.
  • Employees can donate their RMDs to charity. IRA owners can donate up to $100,000 of their annual distributions to qualified charities and have it count toward their RMD. If they have inherited an IRA, these donations are allowable as long as you are over age 70½.
  • Roth accounts are exempt. If employees own a Roth IRA or Roth 401(k), they do not need to take an RMD. However, any distributions taken from a Roth do not count toward your RMD amount either and restrictions also apply to the beneficiaries of inherited Roth accounts.

 

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2013 S&P Capital IQ Financial Communications. All rights reserved.

Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.

Register or login for access to this item and much more

All Employee Benefit Adviser content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access