Key RMD Rules Every Retirement Plan Sponsor Should Know

Required Minimum Distributions (RMDs) are an important compliance responsibility for employers that sponsor retirement plans such as 401(k) plans. Plan sponsors should understand the basic rules governing RMDs because they are ultimately responsible for ensuring their plan operates in accordance with IRS regulations.

What Are RMDs?

RMDs are the minimum amounts individuals must withdraw from their retirement accounts each year after reaching the required beginning age. Currently, participants must begin taking RMDs in the year they reach age 73 from their traditional IRA, SEP IRA, SIMPLE IRA, and employer-sponsored retirement plan accounts. The first distribution is generally due by April 1 of the following year.

Failure to take an RMD may result in an excise tax for participants. The penalty is 25% of the missed amount but may be reduced to 10% if the error is corrected in a timely manner.

The Still-Working Exception

Many workplace retirement plans allow what is commonly referred to as the “still-working exception”. Under this rule, participants who continue working beyond the RMD age may delay distributions from their current employer’s retirement plan if they do not own more than 5% of the business sponsoring the plan.

Roth Accounts and RMDs

Roth IRAs are not subject to RMDs during the lifetime of the account owner. Designated Roth accounts in employer-sponsored retirement plans, such as Roth 401(k) and Roth 403(b) accounts, are also not subject to lifetime RMDs. However, beneficiaries who inherit Roth accounts remain subject to post-death distribution requirements.

Beneficiary Distribution Rules

Under the SECURE Act, most non-spouse beneficiaries must withdraw the full account balance within 10 years of the participant’s death. Recent IRS guidance clarifies that if the participant died after beginning RMDs, beneficiaries may also need to take annual distributions during the 10-year period in addition to fully distributing the account by the end of year 10. Certain exceptions apply.