Required minimum distribution (RMD) rules

What is a required minimum distribution?

A required minimum distribution (RMD) is an IRS requirement that mandates the minimum amount of money an active retirement plan participant who is considered a 5% owner, or a terminated participant must withdraw annually once they turn 73. (Non-owner employees who continue to work past 73 will start receiving RMDs in the year they retire.) 

The RMD amounts withdrawn can increase a retiree's income, potentially pushing them into a higher tax bracket. When RMDs are withdrawn, they are generally treated as taxable income for that year, which may result in higher income taxes. Retirees must understand the impact of RMDs on plan accounts and how they can affect their personal finances and tax planning.

See IRS Publication 590-B - Distributions from Individual Retirement Arrangements (IRAs) for distribution requirements and information about calculating RMDs. 

Before reaching RMD age and taking your first RMD, contact a tax professional or tax advisor to ensure you meet IRS requirements to avoid tax penalties.

RMDs are ineligible for rollover. The distribution will be subject to 10% federal withholding unless you complete a W-4R form with alternate withholding during the request process.

Who must take RMDs?

RMD rules apply to account holders of tax-deferred retirement plans, including rollover IRAs, traditional IRAs, SEP IRAs, and SIMPLE IRAs, along with most 403(b)s and 401(k)s. They also apply to Roth IRAs but don't apply when the account owner is still living.  

You must take one if you have reached 73 years of age AND: 

• Are no longer employed with the company that sponsors your plan, or

• Own greater than 5% of the company that sponsors the plan, regardless of your employment status, or

• Are a parent, spouse, child, or grandchild of a greater than 5% owner of a company, regardless of employment status.

SECURE Act 2.0 changes: Lifetime RMDs start at age 73

The age at which participants in employer-sponsored retirement plans or IRA owners need to start taking RMDs increased from 72 to 73 with the passage of the SECURE 2.0 Act. 

Individuals participating in 403(b)s, 401(k)s, and other non-IRA-based retirement plans sponsored by employers can delay RMDs past age 73 as long as they're still working, unless they are a greater than 5% owner. 

How much of a distribution must participants take?

In most cases, you can calculate the RMD for a given year by using your account balance as of the year-end (12/31) from the previous year divided by a distribution factor from the IRS’s Uniform Lifetime Table. You can learn more using this RMD calculator. 

SECURE 2.0 modifies the RMD amounts due from qualified plans. Starting in 2024, Roth accounts are now exempt from RMD calculations, which aligns qualified plans with IRA minimum distribution regulations.

Note: A separate table is used if the sole beneficiary is your spouse who is 10 or more years younger than the owner (more on this below). In this case, you can review this IRS page to calculate your RMD. 

Understanding the Uniform Lifetime Table

To better understand your RMDs, it is important to familiarize yourself with the Uniform Lifetime Table provided by the IRS. This table provides the distribution factor based on your life expectancy and can be found on the IRS website. 

RMD deadlines and exceptions

There may be some options other than taking a single, lump-sum RMD payment for the year, depending on the terms of the plan. Some plans allow multiple installment payments during the year. Participants should check the summary plan description (SPD) for their plan or ask the plan administrator if this is an option.

If multiple distributions are taken during the year, the total distributions taken for the year must meet the required RMD for that year by the stated deadline. If an individual doesn't take an RMD by the required deadline, the IRS will assess a penalty of 25% on the amount of the RMD that was not withdrawn. This penalty can be reduced to 10% if corrected within a two-year window.

Generally, RMDs must be taken by 12/31 each year. If it’s the first year of a participant’s RMD they may wait until the required beginning date of 4/1 of the following year to withdraw the funds, but by doing so the participant will have two distributions for the first calendar year. RMDs in subsequent years must be taken by 12/31.

There are complicated rules related to RMDs of the death benefit to a beneficiary after the participant's death. The plan’s administrator should be consulted for information in this situation. 

What’s the RMD process at Human Interest?

RMDs, like other types of distribution and withdrawals, are initiated through the plan’s recordkeeper. With Human Interest, there’s little you have to do as a plan administrator:

• Complete or Concierge plan customers: Human Interest acts as your plan’s 3(16) fiduciary for RMDs, meaning that we’ll identify which participants in your plan must take an RMD and send them distribution forms and instructions to complete their withdrawal — no involvement on your part required. 

• Essentials plan customers: Although Human Interest is not acting as your plan’s 3(16) fiduciary, the good news is we still let you know which participants must take an RMD. All you have to do is confirm those participants are correct or submit any changes to Human Interest, including any missing participants. From there, we’ll handle the rest of the communication by sending participants the distribution forms and instructions to complete their withdrawal.  

Similarly, if you’re a participating account holder of a Human Interest 401(k) plan, there’s little to do on your end. We’ll notify you via email if we determine you must take an RMD for the current calendar year and provide a distribution request form to complete along with easy instructions to follow.

Zero transaction fees for RMDs

Human Interest provides zero transaction fees—including $0 distribution fees for RMDs. We believe it’s unfair for businesses and their employees to be blindsided by hefty, hidden fees. The elimination of RMD fees (and more) builds on our already low-cost offerings. If you’d like to discuss 401(k) plans, get in touch with Human Interest today.