Learn How Required Distributions Affect your 401k Savings
One of the key benefits of saving in a 401k is that you can defer paying taxes on your savings until you take money out of your account – but that benefit does not last forever. Once you reach age 70½, the tax rules require that you begin withdrawing your 401k savings to ensure that those tax-deferred dollars enter the tax stream. It does not matter if you do not need the money. If you do not take distributions when you are supposed to, you could face a stiff penalty. As your 401k service provider, Ubiquity Retirement + Savings™ can help make sure you take your required minimum distributions on time.
Your employer or your 401k service provider will tell you how much you are required to take each year. The amount you will be required to take is calculated based on your life expectancy and your account balance. Your employer or your 401k service provider will also provide instructions outlining the steps you must take to initiate the payout.
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RMDs are calculated based on your life expectancy so that payments will last throughout your expected lifetime. The amount you will be required to take each year is a small portion of your account, which is determined by dividing your prior-year end account balance by your life expectancy factor. In most cases, you will use the life expectancy factor from the IRS’s Uniform Lifetime Table, which assigns the number of years of life expectancy based on your age and a possible beneficiary who is ten years younger.
For example, according to the IRS Uniform Lifetime Table, the life expectancy factor for a 72-year-old is 25.6 years. Assuming your year-end 401k account balance is $250,000, you will be required to take a $9,765.63 RMD ($250,000 divided by 25.6 years). For the next year, when you are age 73, the IRS table applies a life expectancy of 24.7 years. Assuming your year-end account balance was $248,000, your RMD would be $10,040.49.
As you start planning for retirement, it is helpful to project how much you will need to take from your 401k plan each year as a required distribution. To estimate your RMDs, there are many calculators available for free online. Here is one that will also tell you the rate of return you need on your investments to maintain your account balance following each distribution.
If the sole beneficiary of your 401k account is your spouse, and your spouse is more than ten years younger than you, you can calculate RMDs using your actual ages and the IRS’s Joint Life Expectancy Table which will result in a smaller RMD amount than using the Uniform Lifetime Table. Check out our resources below for more information.
The tax impact of your RMD depends on the types of contributions you made to your account. 401k RMDs are fully taxable in the year distributed unless you made any after-tax contributions or Roth contributions to the 401k. Unlike Roth IRAs, Roth accounts in an employer-sponsored retirement plan, like a 401k plan, are subject to the RMD rules, even though the distributions may not be taxable.
RMDs cannot be rolled over to another 401k or an IRA. Because they cannot be rolled over, RMDs are not subject to the mandatory 20% withholding that applies to most other types of 401k distributions. You may elect a specific rate of tax withholding, or you may choose to waive withholding altogether.
If you’re a small business owner and need a 401k plan for yourself and your company, only Ubiquity offers flat-fee plans plus free expert advice. We will fully customize your 401k to meet the specific needs of your small business.
Setting up a 401k can be complicated. Only Ubiquity gives small business owners access to 401k experts in addition to industry leading low flat-fees. Each sales expert has over a decade of experience assisting business owners in 401k plan design. Take advantage of this free benefit.
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