When is the First RMD due (the Required Beginning Date-RBD)?
The first RMD must be taken by April 1 of year following the later of the year the participant turns 73 or the year of retirement (if allowed by the plan). Employees must be separated from service to be considered retired, such that employees who continue to receive a W-2 from the plan sponsor for part-time services can continue to delay the RBD until they fully separate from service. 5%-or-more owners follow the IRA rules and must start RMDs by April 1 of the year following the year they turn 73, regardless of their employment status.
However, there are no RMD requirements from designated Roth accounts while the plan participant is alive. This rule is the same for Roth IRA owners.
What is the Deadline for Withdrawing Subsequent RMDs after the First RMD?
After the first RMD, separated participants must take subsequent RMDs by December 31 of each year. If the participant waited until April 1 of the year following the later of age 73 or separation from service, then the participant must take two RMD distributions on the second RMD year.
Example: Mr. Retired Old Yeller turns 73 on July 15, 2024. He must take the first RMD attributable to 2024 by April 1, 2025, (the required beginning date). Mr. Yeller must take the second RMD attributable to 2025 by December 31, 2025, and the third RMD, for 2026, by December 31, 2026. Because he chose to delay his first distribution until April of the year following his 73rd birthday, this means that Mr. Retired Old Yeller will take two RMD distributions in the year 2025.
How Must Mr. Retired Old Yeller Calculate his RMD?
The RMD is determined by dividing the adjusted market value of the pre-tax balance of the retirement plan account balance as of December 31 of the preceding year by the distribution period that corresponds with Mr. Yeller’s age in the Uniform Lifetime Table, which is Table III in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)).
If Mr. Yeller’s SOLE beneficiary is his lovely spouse, Mrs. Trophy Wife, who is more than 10 years younger than him, then Mr. Yeller can use the Joint Life and Last Survivor Expectancy Table (Table II in IRS Publication 590-B).
The tables can be found on the IRS website: About Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)
Plan sponsors and administrators generally put the participants on notice that they must take their RMD, and often assist with the calculation.
403(b) plan participants must calculate the RMD for each of their 403(b) contracts separately but may withdraw the entire RMD from one of the 403(b) contracts. This is because 403(b) contracts are issued to the individual participant, like IRA accounts. Like 403(b) account owners, IRA account owners can aggregate the separately computed RMD amounts for each IRA and withdraw the total RMD from one IRA or a more IRAs. On the contrary, participants in more than one defined contribution plan must calculate and withdraw their RMDs separately from each qualified plan account.
Does Withdrawing MORE than the Required MINIMUM Distribution Reduce the Minimum for the Next Year? No!
Mr. Yeller can withdraw distributions monthly, quarterly, annually, or in any amount that the plan provisions permit, but they must amount AT LEAST the computed RMD amount each year. Taking more than the RMD one year does not mean that Mr. Yeller gets credit next year for the overage. The RMD computation must be performed and satisfied annually, by the due date.
Are There Plan Distributions that Do NOT Count as RMDs?
The following plan distributions cannot be counted towards the RMD amount:
- Defaulted loans treated as deemed distributions- In fact, RMDs are subject to 20% withholding, but defaulted loans are not subject to this withholding.
- Return of excess elective deferrals and other employee contributions
- Dividends that are paid on employer securities
- The costs of life insurance coverage (P.S. 58 costs)
RMDs must be taken prior to a rollover or Roth conversion
RMDs are not eligible for rollover treatment. As such, if Mr. Yeller executes a rollover from the qualified plan to an IRA in a year when an RMD is due, the RMD is required to come out first. The same is the case for a participant with multiple 403(b) contracts or IRA accounts: the full amount of the RMD must be withdrawn before the rest of the account can be rolled over to an IRA. However, plan-to-plan transfers of 403(b) accounts may not trigger a requirement for the RMD to be taken from the transferring plan, but check with your providers to ensure that the RMD is not missed.
Penalties for Failure to Take Sufficient RMDs
If Mr. Yeller’s distributions are less than the RMD for that year, the shortage is subject to a 25% additional tax, or 10% if corrected by the earlier of the last day of the second tax year after the tax is imposed or when the IRS sends a deficiency notice. The excise tax is paid by the individual on Form 5329. The IRS may waive the penalty if the failure to take the RMD is due to reasonable cause and reasonable steps have been taken to correct the deficiency.
Under the IRS’s Self Correction Program, when a plan sponsor is at fault for a failure to distribute RMDs, the plan sponsor may self-correct inadvertent RMD errors or apply for relief through the Voluntary Correction Program (VCP). The IRS may waive the additional tax if the plan sponsor applies for relief through VCP and requests the waiver as part of the submission. If VCP isn’t used to request a waiver of the additional taxes, or getting an official resolution takes longer than the due date of the affected individual’s individual tax return filing due date, each affected participant or beneficiary must apply for relief on an individual basis using the Form 5329 attachment to their individual federal income tax return, as explained above. See the IRS website for more detail: Fixing common plan mistakes – Failure to timely start minimum distributions
Who is responsible?
The minimum distribution rules must be written into the plan, and not following them can lead to the loss of the plan’s tax-qualified status. Recordkeepers retained by plan administrators generally send notices to plan participants who must take RMDs and often help with the calculation. However, failure to distribute Required Minimum Distributions (RMDs) is a plan qualification error, which is the plan sponsor’s problem, but the excise tax is paid by the individual, which is the participant’s problem. In a terrible case of who’s on first, when there is an RMD violation, the plan sponsor thinks it’s the recordkeeper’s fault, the recordkeeper thinks it’s the participant’s fault, the participant thinks it’s the employer’s and the recordkeeper’s fault, and everybody has a problem. Recordkeepers, third party administrators, plan administrators, and plan participants should work closely to ensure that sufficient RMDs are taken to avoid the inconvenience of correction processes and establishing reasonable cause. In this case, it is not easier to ask for forgiveness after the violation.
