Blue Ridge ESOP Associates Industry News

Required Minimum Distributions – What you need to know

Posted by Jessica A. Spittel

Dec 12, 2018 2:30:00 PM

Signature Line PicAs we approach the end of the calendar year, it is a good idea to start thinking about getting your Required Minimum Distributions (RMDs) paid out. For ease of process some clients will include RMD payments along with their normal distribution processing for the year. For others, these payments may be processed later in the year, for reasons such as capturing newly retired employees eligible for their first RMD payment. In any case, it is important to review your plan to ensure all necessary RMD payments have been taken care of.

There is a Required Minimum Distribution Summary Report included in your annual Final Allocation Reports on your ESOPConnection site. This report reflects who is required to take an RMD and the amount they must receive. The report also lists participants who were active as of the end of the prior plan year that have met age 70 1/2 or will meet age 70 1/2 in the next calendar year. Please notify your administrator if any of these active participants have retired as they will likely be required to receive their first RMD.

What to know about RMDs

  1. What is a Required Minimum Distribution (RMD)?

A Required Minimum Distribution is the minimum amount a participant must receive from their qualified retirement plan on an annual basis. A participant will receive their first RMD upon the later of attaining age 70 1/2 or retirement. However, if the participant is a greater than 5% owner or if the retirement account is an IRA, RMDs will begin once the participant attains age 70 1/2 regardless of if the participant has retired, or not. RMDs for Roth IRAs are not due until the owner dies.

  1. What plans do RMDs apply to?
  • IRAs (Traditional, SIMPLE, SEP)
  • ESOPs
  • 401(k) accounts
  • 403(b) accounts
  • 457 accounts
  • Other defined contribution plans
  1. When are RMDs paid out to participants?

RMDs are required to be paid by December 31st of each calendar year. However, if this will be the first RMD paid to the participant, it may be delayed until the following April 1st. Keep in mind, if the first RMD is delayed and paid by the next following April 1st, the participant will be due their second RMD by December 31st of that year.

Example. A participant has ESOP retirement assets and is not a 5% owner. The participant has retired and will turn 70 ½ on July 31, 2017. The RMD can either be paid in 2017, or it can be delayed until April 1, 2018. If the RMD is delayed to April 1, 2018, there will be two RMDs paid in 2018 - the 2017 RMD paid by April 1, 2018 and the 2018 RMD paid by December 31, 2018.

  1. How is a RMD calculated?

A RMD is calculated by dividing the retirement account balance as of the prior December 31st by the life expectancy factor. The IRS has three different life expectancy tables to use to calculate RMDs, which you can find in IRS Publication 590:

  • IRS Joint Life and Last Survivor Expectancy Table. This table applies if the primary beneficiary of the account is the spouse and he or she is more than 10 years younger than the participant.
  • IRS Uniform Lifetime Table. This table applies if the primary beneficiary is the spouse and he or she isn’t more than 10 years younger than the participant.
  • IRS Single Life Expectancy Table. This table applies for the beneficiary of the account.


Participant Birth Date: 7/1/1938. 

Retirement Date: 4/1/2016

December 31, 2017 account balance: $20,000

Life Expectancy Factor (LEF): 18.7 – LEF per IRS Uniform Lifetime Table since the participant will be 80 as of 12/31/2018. 

2017 RMD: $20,000 / 18.7 - $1,069.52 – due by December 31, 2018

  1. What happens if a participant has multiple retirement accounts?

If a participant has multiple retirement plan accounts, generally a participant must receive a RMD from each respective account. The exception to this is if the participant has the same type of account.

Example 1. A participant has an ESOP retirement account and a 401(k) retirement account. The participant must receive a RMD from each respective retirement account.

Example 2. A participant has two Individual Retirement Accounts (IRA). The participant may take an RMD from each IRA, or the aggregate amount out of one of the two IRA’s.

  1. Can RMDs be rolled over?

No, a RMD is not eligible to be rolled into another tax-deferred retirement plan.

  1. How are RMDs taxed?

RMDs are taxed as ordinary income.

  1. What happens if a participant does not take an RMD by the deadline?

If a participant does not take his or her RMD by the required deadline, the participant will pay a 50% excise tax penalty on the amount the participant should have received.

Example. A participant is required to take a RMD of $5,000. The participant receives a distribution of $3,000. The participant will pay a 50% excise tax on the additional $2,000 the participant should have received, or $1,000. This excise tax will be separate from the ordinary income taxes paid on the $3,000 the participant did receive.

It is possible to receive a waiver on the 50% penalty if the participant can demonstrate the missed payment was due to an acceptable error. The participant can file Form 5329 with an explanation of the missed RMD and work to remedy the problem as soon as possible.

Please contact your plan administrator if you have further questions on RMDs.


Topics: Distributions

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