Farrell: Navigating IRS distribution rules is tricky
- Article by: CHRIS FARRELL
- December 1, 2012 - 4:44 PM
QI am over 70 1/2 years and just left my full-time job early in November that had a 401(k) plan. I am confused as to when I must take my first required minimum distribution (RMD). Would appreciate knowing if it must be taken this year or possibly delayed until next year.
AA pet peeve of mine is how complicated the rules are when it comes to retirement savings plans. Washington should make it as easy as possible for people to contribute money during their working years and as simple as possible to take the money out when the time comes.
What we have instead is a Byzantine labyrinth of different regulations for savings and withdrawals, depending on the kind of plan. For example, why is it that a stay-at-home spouse raising kids can put a maximum of $5,000 in an IRA for 2012 while a worker at company with a 401(k) enjoys a potential maximum of $17,000?
All right, time to clamber off the soapbox and get to your question. Now that you are a new retiree you can take your first required minimum distribution before the end of 2012. However, assuming that your 401(k) plan allows it, you have the option of waiting until April 1, 2013, to take your first required minimum distribution. It's your choice.
The potential drawback to waiting until April 2013? "The downside with doing so would be that he would need to take two required minimum distributions that year from that plan," says Ryan McKeown, a certified public accountant and certified financial planner with the Wealth Enhancement Group in Minneapolis.
By the way, many people roll over their 401(k) balance into an IRA when they retire. It can be a good idea, but McKeown advises that you need to withdraw your first required distribution from the 401(k) plan. Then you can roll over the balance into an IRA.
"The distribution must be made before performing the rollover," he says. "If the distribution is rolled over, you would need to take corrective action and ask the IRS to remove the penalty due to a misunderstanding of the tax rules, which they generally do, but aren't required to [do]."
I want to highlight a critical distinction involving RMDs with an employer-sponsored plan like a 401(k) and an IRA. You didn't need to start your first RMD even though you were working past age 70 1/2 because your retirement plan was a 401(k). However, with an IRA your RMD would need to start by April 1 following the year you reached 70 1/2 even if you continue working for the same employer. The requirement includes IRAs offered through an employer, such as the SIMPLE IRA and the SEP IRA. They are considered IRA plans for the purposes of a required minimum distribution.
You can see why I wish Washington would do something to simplify the rules. It would be a big help for the future retirees of America.
I can't figure out the different treatment about taking the first RMD with a person still working past age 70 1/2 with a 401(k) and their peer toiling away at a company with a SIMPLE IRA. Can you?
In the meantime, the IRS website offers a good explanation of the RMD rules at "Retirement Topics -- Distributions (when, how much).'' It's easy to find by putting the title into your search engine.
Chris Farrell is economics editor for "Marketplace Money." His e-mail is firstname.lastname@example.org.
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