The IRS has updated its rules for required minimum distributions, allowing defined contribution plan participants to withdraw less from their tax-deferred retirement accounts than was previously permitted.
IRS actuarial tables dictate the asset amounts that individuals are required to withdraw from their retirement accounts starting at age 72, explains Hailey Fields, retirement plan consultant and director of client services at Multnomah Group.
“If you are trying to not take money out of your plan, the good news is you can take less starting this year because the IRS expects you to live longer,” she says.
The IRS rules affect tax-deferred DC plans, profit-sharing plans and individual retirement accounts. Roth IRAs are not subject to required minimum distributions, under IRS rules.
“If you’re a participant in a 401(k) and you hit 72, but you’re still working, generally you don’t have to take RMDs. You only do if you’re a 5% owner or if you’re no longer working,” Fields says.
The actuarial update is important for plan sponsors to note, but the effect to regular business is limited, as the individuals most affected are likely no longer employed by the plan sponsor, although they may remain plan participants, says Fields.
“It’s certainly important to the folks who are giving advice to participants about what to do with their investments, how they’re retirement planning,” she says. “For plan sponsors, it’s a good opportunity to review who’s giving advice to participants, and what you know about the quality of the work they’re doing. If it’s your recordkeeper, make sure they understand this change.”
The 2019 SECURE Act raised the age for when DC plan participants must start to withdraw slices of their accumulated savings from a retirement plan. But whereas SECURE raised the RMD age, the IRS’ actuarial tables update “changes the actual amount and how you calculate it for how much you need [to withdraw],” Fields says.
Individuals can calculate the amount of their RMD by dividing the accumulated retirement plan account balance by the updated IRS life expectancy on the agency’s website.
“If you can do your taxes, you can do this,” says Fields. “It’s much simpler. The IRS has three separate tables depending on whether you’re the [asset] owner, the beneficiary or if you have a spouse that’s more than 10 years younger than you—so you have to pick the right chart.”
For a 76-year-old individual that inherited an IRA, they would divide the account balance by 14.1, per IRS rules.
Fields adds that plan sponsors and their partners at recordkeepers, retirement plan advisers and consultants must take notice of the change to translate it for participants.
“Anyone who is counseling participants on their retirement plan and their distribution options should be talking about this change and what it may mean,” Fields says.
Multnomah will be reviewing the updated changes with clients at meetings, and plan participants are likely to get information from their recordkeeper, she says.
Large tax bills and penalties await individuals who fail to adhere to the update. There are also possible penalties for plan sponsors, because retirement plan fiduciaries owe the same duties of prudence and loyalty to participants who are no longer employed by the company as they do to current, active participants.
Plan participants with questions can consult the IRS or contact their recordkeeper or a tax accountant, Fields says.
“There are pretty steep penalties for not taking your required distributions—you’d end up having to take much more than you would have if you ignore it,” Fields says. “There are also penalties to plan sponsors if it’s discovered that your plan participants aren’t taking their RMD, so it’s in your best interest to make sure that whoever’s processing those, typically the recordkeeper, is doing it appropriately.”
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