The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Connecticut is representative of a common inquiry involving the withdrawal of required minimum distributions (RMDs) from retirement savings arrangements. The advisor asked:
“A few of my clients who are age 70½ and older are still working and participating in 401(k) plans. Some plans are paying out their RMDs while others are not. Should I be concerned about those who are not receiving RMDs?”
Highlights of Discussion
- Maybe; the answer depends on several factors. However, because your clients could face a 50% IRS penalty for failing to take their RMDs when required, you are right to double check on their RMD status.
- The RMD rules apply to all qualified employer-sponsored retirement plans under IRC Sec. 401(a), as well as to IRC Sec. 403(b) arrangements, eligible deferred compensation plans under IRC Sec. 457(b), and all IRAs, with the exception of Roth IRAs.
- A retirement plan participant’s required beginning date (RBD) for taking his or her first RMD is April 1 following the year he or she turns age 70½, unless the plan document allows for a delayed RBD for working participants who are not “owners.” Plans are not required to incorporate language that would accommodate a delayed RBD for plan participants.
- If a delayed RBD applies, then the plan participant’s RBD is the later of either April 1 following the 70½ year, or April 1 following the year of retirement.
- Owners are defined as those who own more than 5% of the business that sponsors the plan. These individuals cannot delay their RBDs, and must begin RMDs by April 1 following the 70½ year.
- Note that an IRA owner cannot delay the taking of his or her first RMD beyond April 1 following the 70½ year, regardless of whether he or she continues to work beyond age 70½.
Conclusion
As you can see, whether a 401(k) plan participant is required to take an RMD for the year depends on several factors. If there is any question with respect to RMDs, your clients should consult their plan administrators, plan document provisions and tax advisors.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2015 Columbia Management Investment Advisers, LLC. Used with permission.
