Each Wednesday 401kBasics posts a new article in a weekly series called “Keep the Course”. This series is designed to give the average consumer information on how to keep their 401k plan on track! Your feedback or suggestions on future articles is welcome.
As beneficial as the 401k plan is, there comes a time when the IRS requires that you start withdrawing some of your money. This is referred to as a Required Minimum Distribution (RMD).
You’re required to take an RMD by December 31st of each year starting with the year that you turn 70.5 years old, unless you are still working, at which point you can wait to start taking your RMD until the year you separate from service. One exception to this rule is anyone who is a 5% or greater owner will have to take an RMD when he/she turns 70.5 regardless of whether or not he/she is still working.
One quirk to the RMD rules, is that your first RMD can be deferred until April 1st of the following year. However, that would mean you would have to take two RMD’s that year.
The amount of the RMD is based on your account balance at the end of the prior year, divided by your life expectancy factor typically using the Uniform Life Expectancy Table, (exceptions may apply).
You are required to take RMDs from both IRAs and 401k plans, but beware as some of the regulations are not the same between the two vehicles.
Finally, the tax penalty, should you fail to take your RMD, is 50% of what you neglected to withdraw.
For further information, review these FAQ’s available on the IRS website.
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