Employees Need to Know About 401(k) Required Minimum Distributions

February 24, 2020

Effective January 1, 2020, your employees must withdraw at least the minimum amount from their employer-sponsored 401(k) and IRAs (Individual Retirement Accounts) by age 72. The required minimum distribution (RMD) age was formerly 70½. The RMD amount is determined by applying a life expectancy factor set by the IRS to the employees’ account balance at the end of the previous year.

Account-holders who are taking an RMD for the first time may wait until April 1 of the year after the year they turn age 72. For 401(k) plans, they can wait until 72 or until the year they retire, if they don’t have a five percent or more ownership stake in their employer. After that, account holders’ RMD for a given year must be withdrawn by Dec. 31, either in a lump sum or in installments.

If they decide to delay taking their first RMD until the next year, they’ll have to take two minimum distributions during that calendar year. This can put them in a higher tax bracket for that year, which may significantly increase their taxes. They also could have to pay a 50 percent excise tax on the amount that was not withdrawn. That is 50 percent of the difference between the required distribution and the actual distribution. There also is a penalty for not withdrawing the full amount.

Employees can find out how much of their RMD will be taxable by visiting the IRS website.

The RMD deadlines apply even if the account owner dies. The beneficiaries must take the regularly required minimum distribution the year in which the account holder dies. The following year, the required minimum distribution will depend on the age of the beneficiary.

Remember, the more your employees know about their 401(k) accounts, the better informed they’ll be when making decisions about how much to save.

Talk to your local broker about how best to communicate this information.