As a finance expert, I often get questions about Required Minimum Distributions (RMDs) and how they interact with different retirement accounts. One common question is: Are active retirement plans included in RMD calculations? The answer isn’t straightforward because it depends on the type of retirement plan and employment status. In this article, I’ll break down the rules, exceptions, and calculations to help you understand whether your active retirement plan affects RMDs.
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Understanding RMDs and Their Purpose
The IRS mandates RMDs to ensure retirees withdraw a minimum amount from tax-deferred retirement accounts each year. The logic is simple—since these accounts grow tax-free, the government wants its share eventually. RMDs apply to:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k), 403(b), and 457(b) plans
- Other defined contribution plans
The first RMD must be taken by April 1 of the year after you turn 73 (for those born between 1951 and 1959) or 75 (for those born in 1960 or later). Subsequent RMDs must be taken by December 31 each year.
The Key Question: Do Active Retirement Plans Affect RMDs?
The answer hinges on whether you’re still working and contributing to the plan. The IRS treats 401(k)s and similar employer-sponsored plans differently from IRAs.
Rule 1: The Still-Working Exception for 401(k)s
If you’re still employed at the company sponsoring your 401(k) and don’t own more than 5% of the business, you may delay RMDs from that plan until retirement. This is known as the “still-working exception.”
Example:
- You’re 74 but still working at Company X.
- You have a 401(k) from Company X and a Traditional IRA.
- Result: You must take RMDs from the IRA but can delay RMDs from the 401(k) until you retire.
Limitations:
- This exception does not apply to IRAs or old 401(k)s from previous employers.
- If you have multiple 401(k)s, only the one from your current employer qualifies.
Rule 2: IRAs and Former Employer Plans Always Require RMDs
Even if you’re still working, IRAs and old 401(k)s from past employers are subject to RMDs at the usual age.
Example:
- You’re 73, still working, and have:
- A 401(k) from your current job
- A rollover IRA from a past employer
- Result: You must take RMDs from the IRA but can delay the current 401(k) RMDs.
Calculating RMDs: The Uniform Lifetime Table
The IRS provides three life expectancy tables, but most retirees use the Uniform Lifetime Table. The formula is:
RMD = \frac{Account\ Balance\ on\ Dec\ 31\ of\ Prior\ Year}{Life\ Expectancy\ Factor}Example Calculation:
- You’re 75 with a Traditional IRA balance of $500,000 on December 31 last year.
- The Uniform Lifetime Table gives a factor of 24.6 for age 75.
- Your RMD is:
Table: Key RMD Life Expectancy Factors
| Age | Life Expectancy Factor |
|---|---|
| 70 | 27.4 |
| 75 | 24.6 |
| 80 | 20.2 |
| 85 | 16.0 |
What Happens If You Have Multiple Retirement Accounts?
401(k)s and Similar Plans
- You must calculate RMDs separately for each plan.
- However, you can withdraw the total RMD amount from any one (or a combination) of the plans.
IRAs
- You must calculate RMDs for each IRA separately.
- But you can take the total RMD amount from any single IRA or a mix.
Example:
- You have two IRAs:
- IRA 1: RMD = $10,000
- IRA 2: RMD = $5,000
- You can withdraw $15,000 from IRA 1 and $0 from IRA 2 (or any other combination).
Common Mistakes and Penalties
The IRS imposes a 50% penalty on any RMD shortfall. Common errors include:
- Forgetting to take RMDs from old 401(k)s.
- Miscalculating RMD amounts.
- Assuming the still-working exception applies to IRAs.
Final Thoughts
Active retirement plans can be excluded from RMD calculations if you’re still working and meet the IRS criteria. However, IRAs and old employer plans always require RMDs. Proper planning ensures you avoid penalties and optimize your retirement withdrawals. If you’re unsure, consult a tax professional to tailor a strategy for your situation.
