This QOTW has been updated to reflect changes made by the SECURE Act, which was signed into law on December 20, 2019.
Participants who were born on or before July 1, 1949, are required to start taking their RMDs in the year they turn 70 ½. Those born after that date are subject to RMDs on reaching age 72.
One of the non-owner participants in our 401(k) plan will be turning 72 in April of 2021. The participant knows her first RMD is due no later than April 1, 2022, but she has asked whether she has to wait that long to actually withdraw the money.
Could she take her first RMD in 2020? What about sometime in 2021 but before she turns 72?
Before answering your question, let’s quickly review the general timing for required minimum distributions. The deadlines vary based on whether or not a participant owns more than 5% of company sponsoring the plan.
- 5% Owner | These participants are required to take their first RMD no later than April 1st of the year following the year in which they reach age 72. This is true whether they are retired or continuing to work. Subsequent RMDs must be taken by each December 31st, thereafter.
- Non-owner | The rule for non-owners is similar except that they can choose to wait until April 1st of the year following the later of the year they reach age 72 or the year they actually retire before taking their first RMD. Again, each subsequent distribution is required by December 31st of each year.
Now back to your question. Assuming she is retired, your participant will be happy to hear she doesn’t have to wait until April 1, 2022 to take her first RMD, but she also cannot take it during 2020. To be eligible to take an RMD, a participant must wait until his or her initial “Distribution Calendar Year.” This is defined as the year in which the participant turns age 72. Connecting the dots, your participant could take her distribution at any point during 2021 to satisfy the RMD.
There are a couple other considerations to keep in mind.
- The participant must satisfy the RMD rules separately with respect to each company-sponsored plan where she has a balance, but all IRAs can be aggregated and the RMD satisfied by taking a sufficient amount from any one of them. As a result, it might make more sense (logistically and in terms of fees) for her to rollover her entire balance from your plan in to an IRA and take RMDs from there.
- With that said, RMDs are not eligible to be rolled over. That means she would have to complete the rollover in 2020 to avoid an RMD from your plan. If she waits until 2021, she would first have to take the RMD from the plan and then rollover the remainder into her IRA.
- If the participant is still employed, she would not be entitled to take an RMD until she retires. However, if your plan permits in-service distributions, she could access her account that way. It might seem like a difference without a distinction, but an in-service distribution is subject to different federal tax withholding requirements than RMDs and can also be rolled over.
There are a lot of nuances to the RMD rules, so it’s always a good idea to double-check if you are unsure how to proceed…just like you did here. For more information on required minimum distributions and plan distributions in general, please visit our Knowledge Center here, here and here.