By Jeffery Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott
We have written extensively about required minimum distributions (RMDs) for IRAs, but we haven't talked a lot about RMDs for 401(k) plans. Our staff writers and technical consultants have started to receive a steady stream of questions on this topic, so we decided to devote some virtual estate to answer a few of the frequently asked questions.
Q: When do I need to start taking distributions from my 401(k) plan?
A: Generally speaking, you must begin taking required minimum distributions (RMDs) from your 401(k) when you turn 70 ½. You can delay taking your first RMD – for the year you turn
70 ½ - until April 1st of the following year. This is known as the required beginning date.
Q: Why shouldn’t I wait as long as possible to begin taking distributions?
A: If you do not take your first RMD in the year you turn 70 ½, you must take two distributions the following year. To avoid potential penalties, you would need to take one RMD by April 1st of year following the year you turned 70 ½ (your RMD for the previous year) and another by December 31st of the year following the year you turn 70 ½ (for that year). Taking two RMDs in one year will increase your income, potentially pushing you into a higher income tax bracket and/or affecting the deductions/credits you could be entitled to.
Q: What if I am still working? Do I still have to take distributions?
A: If you are still working, you may not have to take RMDs from the 401(k) of the company where you are currently working. If you own less than 5% of the company and the plan has a still working exception – a fairly common provision – then you can delay taking RMDs until the year you separate from service.
Q: Can I take my 401(k) RMD from my IRA instead?
A: No. You cannot aggregate RMDs across different types of retirement plans.
Q: I have multiple 401(k) plans from the different employers I’ve worked for over the year. Can I just take the total RMD for all my 401(k)s from one plan?
A: No. Multiple IRA RMDs can be aggregated and taken from one (or more) IRA accounts as long as the total IRA RMD is correct, but that’s not true for 401(k) plans. Each of your 401(k) plans has its own RMD, which must be taken from that plan.
Q: How about my Roth 401(k)? Do I need to take distributions from there?
A: This one catches a lot of people off-guard. Unlike Roth IRAs, which have no RMDs during the owner’s lifetime, Roth 401(k)s do have RMDs. RMDs for the Roth portion of a 401(k) must start in the same manner as RMDs from the traditional side of the plan. If you are eligible to take a distribution from your Roth 401(k), you can roll the money over (after taking any RMD for the year) to a Roth IRA to avoid future RMDs.
Q: What happens if I don’t take RMDs?
A: If you don’t take an RMD, or you don’t take enough, any shortfall is subject to a 50% penalty. That’s pretty harsh, even by the tax code’s standards. Thankfully, IRS can waive this penalty if you take the necessary steps, but only when the RMD was missed due to reasonable cause. So do yourself a favor and make sure you’re taking the correct RMDs. It will save you a lot of time, headaches, and possibly penalties and interest later on.