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Generally, participants in employer-sponsored retirement plans and IRA account owners must start taking lifetime required minimum distributions (RMDs) soon after they turn 70½. The RMD rules apply to all qualified employer-sponsored retirement plans, including 401(k), 403(b), and 457(b) plans. In addition, RMDs also apply to employer-sponsored IRAs, including SEP, SAR SEP and SIMPLE accounts. Complicating matters further, designated Roth accounts (i.e., 401(k), 403(b), and 457(b) Roths) are subject to lifetime RMDs, whereas Roth IRAs are not.
It is the responsibility of the plan participant and the IRA owner to make sure that they withdraw the correct amount each year from their accounts. Failure to do so can result in stiff penalties. Here, then, is a quick guide to highlight the difference and help you avoid potential pitfalls. RMD rules are found in §401(a)(9) of the Internal Revenue Code.
IRAs (e.g., traditional, SEP, SAR SEP, SIMPLE):
Qualified Plans (e.g.; 401(k), 403(b), 457(b)):
IRAs and Qualified Plans:
Frequently Asked Questions
To further help you understand the lifetime RMD rules, we offer answers to some frequently asked questions:
Q. If I convert my traditional IRA to a Roth IRA,2 would I still have an RMD?
A. You can convert a traditional IRA to a Roth IRA, regardless of your gross income, and potentially eliminate future RMDs in the process. For more information, visit our Roth Conversion Resource Center.
Q. Can I roll over my RMD to an IRA, Roth IRA, or other eligible retirement plan?
A. No. If you choose to roll over your RMD, it will be treated as an excess contribution and would potentially be subject to taxes and/or penalties.
Q. Can I arrange to have an RMD of a qualified plan distributed from my IRA or vice-versa?
A. No. If you participate in more than one qualified plan, your RMD for each plan is determined separately and distributed from its respective plan. However, if you have multiple IRAs, you can withdraw the total RMD amount from any IRA account or accounts you choose.
Q. How would marital status or the death of my spouse affect my RMD?
A. If you were married on January 1 of the year for which the RMD is being calculated, you are treated as married for the entire year, even if you divorce or your spouse dies later in that year.
Q. If the IRA owner or plan participant dies before RMDs have begun, what effect does that have on the beneficiaries?
A. Generally, the entire amount of the owner's benefit must be distributed to the beneficiary who is an individual either within five years of the owner's death, or over the life of the beneficiary starting no later than the year following the year of the owner's death.
Q. Am I allowed to take more than the RMD amount?
Q. Can a distribution above the RMD amount for one year be applied to the RMD for a future year?
Q. Am I eligible to continue participating in my employer's plan upon reaching age 70½ and receiving required minimum distributions?
A. Yes. Your employer must allow you to continue to make and/or receive plan contributions.
Glossary of Terms
Qualified Retirement Plan—This is a savings plan that is allowed certain tax advantages because it meets criteria spelled out in the IRS Code and in the Employee Retirement Income Security Act [ERISA] of 1974. Employers can take tax deductions for any contributions they make to an employee's account. Employee contributions and investment returns are tax-deferred until withdrawn. Contribution limits apply, as do penalties for early withdrawal.
Roth IRA—This is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.
SEP IRA—A Simplified Employee Pension Plan is a retirement plan specifically designed for self-employed people and small-business owners. When establishing a SEP IRA plan for your business, you and any eligible employees establish your own separate SEP IRA; employer contributions are then made into each eligible employee's SEP IRA.
SAR SEP IRA—A Salary Reduction Simplified Employee Pension Plan is a simpler alternative to a 401(k) and is available only to companies with 25 or fewer employees. It gives employees the opportunity to make contributions to their SEP accounts with pretax dollars and reduce their current year's net income. Also called a 408(k) plan.
SIMPLE IRA—A Savings Incentive Match Plan for Employees' IRA is an IRA-based plan that gives small-business employers a simplified method to make contributions toward their employees' retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or non-elective contributions. All contributions are made directly to an Individual Retirement Account (IRA) set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis.
Traditional IRA—This is an individual retirement savings account in which contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.
401(k)—A qualified plan established by employers to which eligible employees may make salary deferral (reduction) contributions on a pretax or aftertax (Roth) basis. Earnings accrue on a tax-deferred basis. Withdrawals are generally included as taxable income in the year received, but may be tax-free in the case of Roth contributions.
403(b)—A qualified retirement plan for certain employees of public schools, tax-exempt organizations, and certain ministers. Generally, retirement income accounts can invest in either annuities or mutual funds. Also known as a tax-sheltered annuity (TA) plan.
457(b)—A nonqualified, deferred-compensation plan established by state and local governments, tax-exempt governments, and tax-exempt employers. Eligible employees may make salary deferral contributions on a pretax or aftertax (Roth) basis to the 457 plan. Earnings grow on a tax-deferred basis. Withdrawals are generally included as taxable income in the year received but may be tax-free in the case of Roth contributions.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is being provided for general and educational purposes only, is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with their appropriate tax, legal, and financial advisors with respect to individual circumstances and all applicable federal, state, and local tax laws.