Employers set up qualified retirement plans (qualified means that they comply with IRS requirements for tax advantages) to assist employees to save money for their retirement. The federal government also permits individuals to save on their own with an Individual Retirement Arrangement (IRA). These employer sponsored retirement plans and IRAs share the aspects of tax deductible contributions and tax-deferred growth during the savings years. But there comes a time when IRS wants to collect their taxes and thus these plans call for required minimum distributions (RMDs) at age 70½ in most cases. The qualified plan and IRA RMD are taxable as regular income. Let's take a closer look at the IRA RMD and employer sponsored plan distribution requirements.
Company sponsored plans include 401(k) plans, Roth 401(k), 403(b), defined benefit plan (e.g. pension plans). Individual retirement plans include your IRA and your Roth IRA. All Roth plans grow tax-free with tax-free distributions because they're funded with after tax-contributions.
The IRA RMD is necessary to be initiated in the year following age 70½. It must be noted that if you are presently working with a company and are not an owner, you defer commencing your qualified plan RMD until retirement (but you must commence your IRA RMD). RMDs are an amount that must be withdrawn and is calculated on the total of all accounts of a similar type. If you have 3 IRAs, you total them up to determine your IRA RMD. If you have 3 401k accounts, you total them up to determine the 401k RMD. But because the IRA and 401k are different plan types, you do not add the totals together. You must take a separate RMD from each type of retirement plan you have. Assuming you have 3 IRAs, you are permitted to take the withdrawals for just one IRA or from all 3 -- that is your prerogative. Let's look closer at how much you need to withdraw.
It is compulsory that the qualified plan or IRA RMD begins by April 1st of the year following when your age will be 70½. However, by December 31 of that same year, you must make your 2nd IRA RMD (an RMD must be taken each calendar year). This makes for two IRA RMDs within one year, which may increase the "IRA tax" as you could be pushed into a higher tax bracket. It is therefore advisable to commence your first IRA RMD before December 31 of the year when your age becomes 70½ and then go for the 2nd IRA RMD by December 31 of the next year in order to avoid doubling up the IRA RMD in your first distribution year.
The IRA minimum distribution is calculated by totaling up your IRA balances from December 31 of the prior year and dividing by your life expectancy (the total does not include Roth IRAs as they are of a different type of plan than traditional IRAs). IRS defines life expectancy as per IRS Publication 590 Appendix C. Refer to Table III in Appendix C for this, or else refer to Table II if you are married to a spouse who is more than a decade younger than you. Table I is specifically for beneficiaries of an IRA (when the owner has died) .
You simply look up your age in table III and read the corresponding (remaining) life expectancy. You divide this into the total of your IRAs form the prior December 31 and that is your IRA RMD. You repeat the same exercise for each different plan type (e.g 401k, 403(b), etc)
Note that the Roth IRA does not have an IRA RMD during the owner's lifetime. Interestingly however, a Roth 401(k) has required RMDs. The distribution whether from a Roth IRA or Roth 401k is tax free. If your situation permits, the best thing to do is to distribute your Roth 401k to your Roth IRA so as to avoid making a RMD.
Required Minimum Distribution for Owner(not beneficiary)
|Plan Type||Tax Status||RMDs begin|
|IRA||Tax-deferred||After turn 70½ by IRA rules|
|Roth IRA||Tax-free||No RMDs|
Note: Delay RMDs if still working for company with plan,
|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)|
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions
If someone is 73, what is the definition of retirement? not working 40 hours a week? What if they work 20 or 30 hours a week, are they considered retired from an RMD standpoint?
the requirement for minimum distributions has nothing to do with working status or how many hours worked regarding an IRA. Distributions must start after reaching age 70 1/2. The one exception applies to an employer plan: If you continue to work beyond age 70 1/2 (no specific number of hours), and do not own more than 5% of the business you work for, you may be able to defer taking MRDs from your current employer’s Keogh, 401(k), 403(b), or other employer-sponsored retirement plan until April 1 of the calendar year after the year in which you retire. Please consult your plan administrator to learn more.