Learning 401k Mandatory Withdrawal Rules

By Harris Walker
Updated December 29, 2016
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Learning 401k Mandatory Withdrawal RulesIf you have a 401k, you will be subject to the 401k mandatory withdrawal rules, also known as "minimum distribution". These rules apply to all types of retirement accounts, and they start to come in effect when you become 70 and a half years old, unless you have a Roth IRA. Some key factors to remember first are:

- You can withdraw as much as you want, so long as you meet the minimum.

- If you received any contributions tax free, you will be taxed on them, unless they meet certain exceptions.

What Are the 401k Mandatory Withdrawal Rules?

Required minimum distributions (RMDs) usually have to start when people turn 70 and a half, or in the year in which they retire if they work past that age. If they own at least 5% or more of the business that sponsors the 401k, they must start taking RMDs as soon as they reach 70 and a half.

Different RMDs exist for those who die before they were able to start taking them out. Usually, however, the full amount must be distributed within five years after the death of the owner, or over the lifetime of the beneficiary so long as it starts within a year of the death of the owner.

How Do the 401k Mandatory Withdrawal Rules Apply?

RMDs apply to all 401k retirement plans, including Roth 401k. Your first RMD must be taken in the year in which you reach the age of 70 and a half, although you can delay this to April 1 of the following year. After that, you must take your RMD by that year's December 31.

Usually, the RMD calculation is made by dividing the amount in the account by the life expectancy of the plan holder. The IRS publishes what they class as average life expectancy on their Publication 590-B. If you have multiple 401k plans, you must take the RMD from each of those plans individually.

Breaking the 401k Mandatory Withdrawal Rules:

If you do not withdraw an RMD, whatever is left in the account will be taxed at 50%. You will also need to fill in Form 5229, Additional Taxes on Qualified Plans and Other Tax-Favored Accounts. It is possible for this penalty to be waived, but only if you can prove that it was a reasonable error, and that you are doing everything to remedy it. You must also file Form 5329 with a letter of explanation.

What About Taxes?

Your account will be taxed at the income tax rate that is relevant to you. You cannot roll your RMD over into another tax-deferred account, as explained in IRS Publication 590-B.

What About Employers?

If an employee is over the age of 70 and a half and has to take RMDs, then the employer does have to continue to make contributions or, if possible,salary deferrals. The Employee Plans Compliance Resolution System further explains this.

401k plans are complex plans, but very beneficial plans. Do make sure, however, that you stick to all the relevant rules.





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This site offers information designed for educational purposes only. You should not rely on any information on this site as a substitute for professional medical advice, diagnosis, treatment, or as a substitute for, professional counseling care, advice, diagnosis, or treatment. If you have any concerns or questions about your health, you should always consult with a physician or other health-care professional.