Do Required Minimum Distributions Apply To My 401k?

Older Couple 12 12 13I was recently asked if distributions were required from a 401(k) account. It was a great question. The answer is not as simple as yes or no.

The IRS requires all IRA owners to make a minimum distribution each year after they turn age 70 ½. But they provide an exception on certain 401k plan assets, if you are over age 70 ½ and still working. The IRS says that as long as an individual is classified by the employer as an employee, they are not required to make a distribution from their company’s 401(k) plan in most cases. But there is a little known exception to this rule. The exception here is this: the 401k plan document must allow for the waiver of Required Minimum Distributions or RMD’s. So depending on how the plan is set up, a distribution from a 401k may be required in certain circumstances once an employee turns age 70 ½, even if they are currently employed by the company that offers the 401(k) plan.

What if you have money in a 401(k) and don’t work – part time or otherwise?

Do you need to do an RMD in that case? Yes, although the calculation is done differently. With a traditional IRA, the IRS allows you to add up the total balance of all your IRA accounts as of 12/31 of the previous year. Your IRA RMD is based on that amount and your age, and can be taken from one IRA, all the IRAs or in any combination.  With a 401k, the IRS requires you to take a separate RMD from each 401(k) account.

How about my 457 Deferred Comp Plan, 403(b), SIMPLE or SEP IRA or other workplace retirement plan?

Is there an RMD from those plans if I am still working at age 70 ½? Maybe. It depends on the plan. IRA based plans like the SIMPLE or SEP IRA require a minimum distribution once an individual turns age 70 ½ regardless of whether they are still employed at the company sponsoring that plan. Qualified plans in general, which includes 457 Deferred Comp and 403(b) plans may not require a minimum distribution at age 70 ½, if the employee is still working for that employer and the plan document allows for the deferral of the RMD.

With more and more people working to age 70 and beyond, it pays to find out exactly what the RMD requirements are for your plan. With a penalty of 50% of the required distribution amount you will want to be sure you get the answer to this question right.

If you have questions regarding your RMD or other questions relating to IRAs and retirement plans, contact me at 651-379-3935 or mpbranch@focusfinancial.com.

Required Disclosure:  “Distributions received before age 59 ½ are subject to an early distribution penalty of 10% additional tax unless an exception applies.  Individual situations can vary, therefore, the information presented here should only be relied upon when coordinated with individual professional advice.  This information is not intended to be a substitute for specific individualized tax, legal or estate planning advice.”