Are You in Your 70s? The What, Who, and How of Delaying RMDs
By Kristoffer Aas, EdM
Every year, retirement savers in their 70s are faced with either starting or delaying their required minimum distributions (RMDs): whether it be from an employer-sponsored retirement plan or an individual retirement arrangement (IRA). The required beginning date (RBD) determines how long an account owner can delay taking an RMD. As different RBDs may apply, the topic is notoriously confusing. But we are here to help.
NOTE: Employer-sponsored plans include 401(k), profit sharing, 403(b), and 457(b) plans, while IRAs include Traditional IRAs, SEP IRAs, SAR-SEPs, and SIMPLE IRAs (Roth IRAs are not subject to RMDs while the owner is alive). Unless otherwise stated, IRAs follow the same rules as employer-sponsored retirement plans.
What Does it Mean to Delay?
Account owners may use the following options to delay taking their RMDs. The first option is available to everyone while the other is available only to certain plan participants.
IRA owners and plan participants generally must begin taking RMDs in the year that they attain RMD age, but can delay taking their first RMD until April 1 of the following year (their RBD).
Certain plan participants can also, plan permitting, delay taking their first RMD until April 1 of the year following the year that they retire. This option is not available to plan participants who are five-percent owners (defined below) or to IRA owners.
NOTE: Subsequent RMDs must be taken by December 31 every calendar year. Account owners who delay taking their first until April 1 of the following year will have two RMDs due for that year (i.e., the first for the year of attaining RMD age and the second for the year following).
Who are Five Percent Owners?
The following individuals are considered to be five percent owners.
If the employer sponsoring the plan is a corporation, a five percent owner is anyone who owns (or is considered to own) more than five percent of the outstanding stock or possesses more than five percent of the total voting power of all the corporation’s stock.
If the employer sponsoring the plan is not a corporation, a five percent owner is anyone who owns more than five percent of the capital or profit interests in the business.
The spouse, child, grandparent, or parents of any of these individuals are also deemed to be five percent owners.
Example: Fred, age 73, continues to work for his son Jack, who owns a construction company. Fred participates in the company’s 401(k) plan, which allows delayed RMDs. Fred has no actual ownership, but because he is attributed his son's ownership, he is a statutory five percent owner, and must begin taking RMDs.
How is a Missed RMD Corrected?
If an individual fails to take an RMD, the total missing RMD amount must be taken as soon as possible. The excess accumulation penalty tax is 25 percent of the RMD amount not taken. If a failure to take the RMD is corrected in a timely manner, the penalty tax on the failure may be reduced to 10 percent. Before 2023, the excess accumulation penalty tax was 50 percent without a possible reduction.
To qualify for the reduced 10 percent penalty tax, the RMD must be satisfied during a specified correction window, which begins on the date the penalty tax is imposed and ends the earlier of
the date that a notice of tax deficiency is mailed;
the date that the penalty tax is assessed (i.e., recorded) ; or
the last day of the second taxable year beginning after the year in which the penalty tax is imposed (i.e., applied).
To pay the penalty tax or to apply for a waiver, account owners can file IRS Form 5329 with their federal income tax return. Plan sponsors taking responsibility for a significant number of missed RMDs can use the Voluntary Correction Program under the IRS’s Employee Plans Compliance Resolution System (EPCRS).
