What Is a Required Minimum Distribution (RMD)?

Contributing to your 401(k) account is only part of your retirement journey. Once you reach age 73, the IRS requires you to start taking Required Minimum Distributions, (RMDs), from your account. The good news is you can delay these until you retire unless you own more than 5% of the company. Understanding RMDs now can help prevent costly surprises down the road. This guide will help you learn what to expect so you can plan ahead.

Key Takeaways:

• You’re required to take RMDs at the age of 73 unless you’re still working. Then, you can delay taking RMDs until retirement unless you own more than 5% of the company. 
• The age for beginning your RMD payments will increase to 75 in 2033.
• Not taking your RMD could result in expensive penalties.
• If you miss taking your RMD because of an error, you have two years to correct it.
• Easily calculate your RMD with our RMD calculator.
• Sign in to your employee dashboard to request a distribution.

RMD purpose and age increases explained:

As a retirement plan participant, the government eventually wants you to withdraw your funds and pay taxes on them. That’s why you’re required to begin taking Required Minimum Distributions, (RMDs), by April 1^st of the year after you turn 73. If you’re still working, you can delay RMDs until retirement unless you own more than 5% of the business that sponsors the plan.

The IRS aims to give workers more time to allow their retirement savings to grow and collect returns before taking their first RMD, potentially resulting in a larger nest egg for their retirement years ahead. In 2023, the age increased to 73 from 72. Eight years from now, in 2033, it will rise again to 75.

Eligibility requirements for RMDs:

According to the IRS, RMDs apply to all employer-sponsored retirement plans including 401(k)s and traditional IRAs.

If you are age 73, currently employed, and don’t own more than 5% of the company, you may hold off on taking your RMD until you retire. If you’re 73 and are no longer employed, you must take your distribution by April 1st of the year after your employment ends, either due to retirement or leaving your job.

Penalties for not taking an RMD:

If you don’t take your RMD in a timely manner, you may face a 25% penalty on the required amount. For instance, if your required RMD is $15,000 and by the December 31st deadline, you’ve only withdrawn $5,000, you’d be short $10,000, so the IRS will place a 25% tax on this amount. As a result, you’ll owe $2,5000. This is in addition to any taxes on the $10,000 that you didn’t withdraw.

However, if you correct this within two years and show reasonable cause for the initial failure such as illness or an error, the IRS may adjust the fee to only 10% or consider waiving the penalty. To qualify for a waived penalty, you must complete and file form 5329 with an attached letter of explanation.

RMD calculations:

For your convenience, we provide you with an easy-to-use RMD calculator, accessible from your employee dashboard. Sign in and navigate to Tools and Resources. From there, you’ll be guided to a selection of calculators. Select Required Minimum Distribution. Next, you will be guided to a table where you will input the following information:

• Date of birth
• Account balance as of December 31^st
• Dollar amount of your year-to-date distributions
• Any outstanding contributions (detailed on the calculator)
• Answer yes or no to having a spouse who serves as your beneficiary
• Spouse’s date of birth (if applicable)

Once these steps are complete, press calculate. Then, the amount of your RMD will be displayed.

Interested in doing the math on your own? The IRS calculates your RMD by dividing your retirement savings balance by your life expectancy, outlined in the appropriate IRS’ life expectancy table.

Let’s take a look at some numbers for clarity. If Sara, who is 73, had a 401(k) account that was worth $100,000, and we divided that by 26.5 (found on the life expectancy table), the remaining amount would be about $3,773.58. This would be the amount that Sara would be required to withdraw from her 401(k) annually.

How to request a distribution:

Need help taking your first RMD? We’ve got you covered. The following steps make the process simple.

You can request to take a distribution using the following steps:

1. Sign in to your employee dashboard.
2. On your home page, select Take a Distribution located to the right of your screen or navigate to the Withdrawals menu option and select Request a Distribution.
3. Select the Required Minimum Distribution option.
4. Input the correct year you’re taking the RMD for.
5. Set the dollar distribution amount.  
6. Choose where to withdraw your money from the available sources, (deferrals, employer contributions, etc.).
7. Choose delivery method, (mail or wire).
8. Provide your electronic signature.

Conclusion:

Now that you understand how RMDs work, how to take a distribution, and the penalties you may be subject to if you fail to take your RMD, you’re prepared to take your first distribution when the time comes.