Qualified Plan and IRA Minimum Withdrawal

The intention behind creating qualified plans is to aid the workforce in saving a significant amount for their retirement. Many plans permit the tax-deductible contributions and tax-deferred growth during the accumulation years. On the whole, these programs require an IRA minimum withdrawal (often called IRA minimum distributions or RMD) at age 70½. RMDs are taxed as ordinary income. What exactly are the requirements of these required minimum distributions?

Let's think about the distributions ins two parts--the requirements for personal retirement plans and for qualified (company) retirement plans. The personal retirement plans constitute your Individual Retirement Arrangement (IRA) and your Roth IRA. The company retirement plans include 401(k), Roth 401(k), 403(b), and defined benefit (pension) plans. All Roth plans grow tax-free with tax-free distributions because they're funded with after tax contributions.

RMDs from traditional IRAs and qualified plans must begin after turning 70½ according to rules as summarized in the table below. But if you are currently employed for a company that offers you a qualified plan in which you participate, you can defer making IRA RMDs until you retire. The amount of RMD is based on the aggregate balance of accounts of the same type. To state that more clearly, if you have more than one IRA account, you can sum your IRA account balances and take an IRA minimum withdrawal from a single IRA account or from any combination of IRAs. It is not valid, however, to combine your IRA balances with any other type of plan balance, say 401k, because they belong to different plan types.

The very first IRA minimum withdrawal must be taken by April 1st following the year you turn 70½. However, by December 31 of the same year, you must make your 2nd IRA minimum withdrawal (because these required withdrawals are annual). This makes for two IRA RMDs within one year -- which may increase the taxpayers income and his tax bracket. As such, it is advised to commence your first IRA minimum withdrawal before December 31 of the year when your age becomes 70½ and then take 2nd IRA RMD by December 31 of the next year. That way, you won't need to "double up" your withdrawals in the first year, potentially pushing ourself into a higher tax bracket and incurring more IRA tax.

Let's add some specificity to the rules. The IRA minimum withdrawal ( and the RMD for each type of retirement plan you own) is figured taking the sum of all the IRAs (excluding Roth IRAs for the Roth is a separate type of retirement plan from a traditional IRA) on December 31 of the previous year and diving by your life expectancy. Life expectancy is defined by IRS publication 590 Appendix C. Refer to Table III in Appendix C, or refer to Table II if you are married to a spouse who is more than a decade younger than you. Table I is for those who are beneficiaries of the actual owner of an IRA (for those who inherit an IRA).

Browse through the table and go to the row which matches your age and read across for your life expectancy. Divide that into your prior year December31 IRA total balance to obtain your IRA minimum withdrawal. You are free to take your withdrawal from any single IRA or from any combination of IRAs.

Note that while both the Roth IRA and Roth 401(k) offer tax-free withdrawals, the Roth 401k has an RMD while the Roth IRA does not. Therefore, when permitted, it may be better to transfer your Roth 401k balance to your Roth IRA to prevent having to make an RMD.

Required Minimum Distribution for Owner (not beneficiary)
Plan Type	Tax Status	RMDs begin
Personal Plans
IRA	Tax-deferred	After turn 70½ By IRA rules
Roth IRA	Tax-free	No RMDs
Company Plan Examples Note: Delay RMDs if still working for company with plan, and check rules with Plan Administrator
403(b)	Tax-deferred	After turn 70½
401(k)	Tax-deferred	After turn 70½
Roth 401(k)	Tax-free	After turn 70½ (tax-free RMDs)