One of the key benefits of saving in a 401(k) 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 a certain age, the tax rules require you to begin withdrawing your 401(k) savings so 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 401(k) service provider, Ubiquity Retirement + Savings™ can help make sure you take your required minimum distributions on time.
401(k) Required Minimum Distribution Rules
1. What
You must begin drawing down your 401(k) savings when you reach the applicable RMD age set by the IRS. Under the SECURE 2.0 Act, the RMD age is 73 for individuals who turn 72 after December 31, 2022. The RMD age increases to 75 for those who turn 74 after December 31, 2032.
At that point, you must take a required minimum distribution (RMD) each year until your account is depleted. If you're still working for the employer beyond your RMD age, you may be able to delay RMDs until you stop working, if your plan allows this delay. The delay option is not available to you if you own 5% or more of the business. If you participate in more than one employer plan, you must take an RMD from each plan.
2. When
You must take your first RMD by April 1 of the year after you reach your RMD age (or retire, if your plan allows delayed RMDs). This is called the Required Beginning Date. After that, you must take the required amount by December 31 each year.
If you wait to take your first RMD between January and April of the year following the year you reach RMD age, you'll end up with two taxable distributions in the same year—something you should consider in your retirement income planning.
3. If
If you don't take your RMD each year, you'll owe an additional tax equal to 25% of the amount that should have been distributed but was left in the plan. The penalty drops to 10% if you correct the shortfall in a timely manner—generally within two years of when the RMD was originally due. (Note: This is reduced from the 50% penalty that applied before the SECURE 2.0 Act took effect.)
If a participant or saver doesn't provide RMD payment instructions to their 401(k) administrator, the employer will direct the administrator to make the RMD payment. If an employer allows RMDs to remain in the plan, it could be disqualified, which would cause employees and employers to lose the tax benefits associated with saving in a retirement plan.
If you're the business owner, you'll want to make sure you keep an eye on the distributions required for any participants in your plan (current or former employees) who have reached their RMD age.
4. How
Your employer or your 401(k) service provider will tell you how much you're required to take each year. The amount is calculated based on your life expectancy and your account balance. Your employer or your 401(k) service provider will also provide instructions outlining the steps you must take to initiate the payout.
401(k) RMD Calculator
RMDs are calculated based on your life expectancy so that payments will last throughout your expected lifetime. The IRS publishes Life Expectancy Tables that 401(k) administrators use to calculate annual RMDs. The amount you must withdraw will adjust each year based on your account balance and updated life expectancy factor.
A Note on Roth Accounts
As of 2024, RMDs are no longer required from Roth 401(k) accounts during the account owner's lifetime, thanks to a SECURE 2.0 provision that aligns Roth 401(k) treatment with Roth IRAs. This change makes Roth 401(k) accounts even more attractive for retirees who want to preserve tax-free growth for as long as possible.
Talk to Ubiquity About Your RMDs
Whether you're approaching RMD age or managing a plan with participants who are, Ubiquity makes it easy to stay compliant. Our flat-fee 401(k) plans and dedicated support team help small business owners and their employees navigate distribution rules with confidence.
Contact us today to learn more about how we can help you manage RMDs and the other moving parts of your retirement plan.
