Required Minimum Distributions (RMD) should be paid by December 31 each year to participants who have reached age 73. However, a participant may elect to delay their first distribution until April 1 of the following year. If the first distribution is delayed, two distributions will be paid in the same year.

The plan document may allow participants who are currently employed to delay distributions until termination of employment, although participants who own more than 5% of the company that sponsors the plan are required to take their RMD regardless of employment status. If the participant has died, the distributions could be subject to grandfathered rules and distributions may be required even though the participant hadn’t reached age 73.

RMDs are calculated by combining a life expectancy factor with the account balance on December 31 of the prior year. While the RMD is the minimum distribution that’s needed, more can be withdrawn if requested by the participant and allowed by the plan document.

Retirement plans allow for the delayed taxation of money so that participants can save for retirement. While the intention of the plan is to benefit the participant directly, some individuals may incorporate them into estate planning to reduce their tax liability. For this reason, RMDs force money to be withdrawn from the plan so the government can collect the taxes that had been deferred. As of 2024, RMDs from Roth accounts are no longer required.

If the RMD isn’t taken, excise taxes will need to be paid by the participant, and the plan could be subject to disqualification. For this reason, it’s very important to identify when distributions are required and ensure they are issued on time. Please contact us if you have any questions regarding RMDs for your participants.