Qualified retirement plans are intended to provide income to participants when they reach retirement age. Required minimum distributions (RMDs) are the distributions that must be made from the retirement plan in order to meet regulations and avoid significant penalties.
The IRS requires that participants who have attained age 70 1/2 and also own more than 5% of the company stock must begin to receive annual minimum distributions (RMD) from the retirement plan in the year in which he or she turns age 70 1/2. The IRS requires minimum distributions (RMD) from the retirement plan when a non owner participant attains age 70 1/2 and retires. The first RMD can be delayed until April 1st of the year following the year he or she turns 70 1/2. For all subsequent years, including the year in which the first RMD was paid by April 1st, the account owner must take the RMD by December 31st of the year.
The dollar amount must be distributed is determined by dividing the prior December 31 balance of the participant account by a life expectancy factor. The IRS has published three tables to be used to find the life expectancy factor, depending on the participant’s situation.
It is very important to pay attention to the deadlines for these distributions. The IRS has imposed steep fines for missed Required Minimum Distributions. If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%.
Please contact Anne Christian, CPA if you have any questions about Required Minimum Distributions from a Qualified Retirement Plan.