Information Letter 2016-0039 (Apr. 14, 2016)
Available at https://www.irs.gov/pub/irs-wd/16-0039.pdf
The IRS has released an information letter that responds to several questions about required minimum distributions (RMDs) from individual retirement accounts (IRAs) and qualified retirement plans (including 401(k) plans). Here is a summary:
When must RMDs begin? The letter notes that while RMDs from IRAs must begin by April 1 of the year after the IRA owner attains age 70-1/2, the required beginning date for employer-sponsored retirement plans is generally April 1 after the later of the year in which the participating employee attains age 70-1/2 or “retires” (what constitutes retirement is discussed below).
Does part-time employment delay the required beginning date for retirement plan RMDs? The letter indicates that the Code and regulations do not define what constitutes a sufficient separation from service to trigger the retirement condition for starting retirement plan RMDs. As a result, a retirement plan’s terms will determine whether part-time employees who have attained age 70-1/2 must begin receiving RMDs.
How are RMDs calculated and paid for persons with multiple accounts? The letter explains that the RMD amount attributable to each IRA, 403(b) contract, and other retirement plan must be calculated separately, but the amount actually distributed from any one of an individual’s multiple IRAs or multiple 403(b) contracts can be different. The aggregate RMDs attributable to multiple IRAs can be taken from one or any combination of the IRAs, and a similar rule applies to 403(b) contracts. The RMD amounts attributable to other types of retirement plans, however, must be taken separately from each of those plans.
EBIA Comment: This information letter highlights two key differences in the RMD rules that apply to IRAs and qualified retirement plans. (For a chart comparing RMD rules for IRAs and defined contributions plans, see the IRS’s webpage “RMD Comparison Chart (IRAs vs. Defined Contribution Plans).”) First, employees who continue working past age 70-1/2 may be able to delay their retirement plan RMDs longer than their IRA RMDs. That will not always be the case, however, because many retirement plans, by design, do not allow RMDs to be delayed by continued employment (and the retirement portion of the required beginning date definition does not apply to more-than-5% owners). Second, while an individual’s aggregate IRA RMDs can be taken in whole or in part from any IRA, the RMD attributable to any retirement plan must be taken from that retirement plan (except in the case of Code § 403(b) tax-sheltered annuity accounts). A third difference, not mentioned by the letter, is that Roth IRAs are not subject to any RMD requirements while the owner is alive, but designated Roth accounts in retirement plans are subject to the RMD rules like any other retirement plan account. For more information, see EBIA’s 401(k) Plans manual at Sections XII.I (“Required Minimum Distributions”) and VIII.E (“Roth Contributions: Designated as After-Tax”).
Contributing Editors: EBIA Staff.