No Fooling: RMD Deadline Looms

March 31, 2004 (—Thursday is an important day for some retirees: the date by which they must take the first required minimum distribution (RMD) from their 401(k), IRA, or other employer-based retirement accounts.

According to IRS rules, IRA holders and owners of 5% or more of a business must begin taking distributions from the plan no later than April 1 of the year after they attain the age of 70 ½, retired or not.   Those still working do not need to take a distribution from a company plan, but will have a RMD from IRAs or previous employers’ retirement accounts under a significant simplification of the rules unveiled in 2002 (see IRS Releases Final RMD Revisions ). Additionally, there are no required distributions from a Roth IRA, where contributions are invested on an after-tax basis.

How are RMDs determined?

  • To calculate how much to withdraw, aggregate the balances of like plans, such as IRAs, 401(k)s, etc., as of Dec. 31 of the year before turning 70 1/2.
  • Then, divide the amount by the participant’s life expectancy factor based on the IRS tables, either the Uniform Lifetime Table or, for those with spouses more than 10 years younger, the Joint Life Expectancy.   Both tables are at Appendix C, Tables II and III

The distribution can be taken from one account or multiple ones and, as a result of the new rules that went into effectJanuary 1, 2003 , participants can determine their payments based on their retirement account value as it changes from year to year.

If the RMD is not taken, the IRS collects a penalty equal to half of the difference between the amount that should have been withdrawn and the amount actually withdrawn, if any.