As we approach the end of the calendar year, it is important to be reminded about one frequently overlooked retirement plan requirement. Upon attainment of age 73, certain participants of a tax-qualified retirement plan may be required by federal tax law to withdraw a minimum amount from such plan each year. These mandatory distributions are known as “required minimum distributions” (“RMD(s)”).

Depending upon the terms of the specific retirement plan, RMDs must begin to be withdrawn by April 1 of the year following the later of: 1) the year you attain age 73; or 2) the year you retire, provided you are not a 5% or greater owner of the business. For years after the initial RMD is made, the requisite RMD amount must be withdrawn by December 31 of each year. This includes the calendar year after an individual attains age 73, even if the first RMD is withdrawn during that same year. If an RMD is not withdrawn by the applicable deadline or is withdrawn in less than the full required amount, the amount not withdrawn is subject to a 25% excise tax. However, this excise tax can be further reduced to only 10% if the failure is corrected quickly.

The discussion above considers the current version of the rule which became effective under the federal legislation commonly referred to as SECURE 2.0. However, prior to the enactment of SECURE 2.0, the age which triggered the potential need to begin to take an RMD was age 72 and prior to that the triggering age was 70-1/2. As if that isn’t confusing enough, SECURE 2.0 increases the age that RMDs must begin to 75 for any individual who turns 74 after December 31, 2032.

In order to help illustrate who is subject to the different age threshholds, please refer to the following chart:

Birth Date or Year RMD Age

6/30/1949 or earlier 70-1/2
7/1/1949 to 1950 72
1951 to 1959 73
1960 or later 75

An RMD amount is calculated by dividing the value of the retirement account of the affected individual as of December 31 of the immediately preceding calendar year by a life expectancy factor prescribed by certain IRS Tables. There are three different tables that could be employed. The Joint and Last Survivor Table is used if the sole beneficiary of the account is a surviving spouse and the spouse is more than 10 years younger than the participant. The Uniform Lifetime Table is utilized if the surviving spouse is not the sole beneficiary or is not more than 10 years younger than the participant. Finally, the Single Life Expectancy Table is used in certain circumstances by a beneficiary if the participant has died.

Here is an example using the Uniform Lifetime Table:

1. Account balance on December 31of the previous year $55,000

2. Appropriate value from Uniform Lifetime table (age 79) 19.5

3. Line 1 divided by number entered on line 2 = your RMD for this year $2,820.51

We hope that this article helped you to better understand this topic. However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such. If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional. For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.