Tip of the Week: RMD General Concepts

Editor’s Note: This is an occasional feature in the NTSA Advisor. It is drawn from The Source, a book that covers technical, compliance, administrative and marketing aspects of the 403(b) and 457(b) markets. More information about The Source is available here.

The following general concepts about required minimum distributions (RMDs) are important to note.

1. Distributions from 403(b), 457(b) and 401(a), including 401(k) plans must take place by April 1 of the calendar year following the year in which the participant turns age
70½ or severs employment with that employer, if later. Five-percent owners of the plan sponsor who are participants in a 401(a) or 401(k) plan do not have the option
to delay the distribution past 70½ if they continue to be employed. Note that public education and 501(c)(3) employers will not have shareholders.

2. Distributions from IRAs (other than Roth IRAs) are required to begin RMDs at age 70½ regardless of their employment status.

3. Contributions may be made to a 403(b), 457(b) or 401(a), including 401(k), plan as long as participants continue to work as employees, even if an employee works
beyond age 70½.

4. Contributions to a traditional IRA cannot continue beyond the attainment of age 70½ unless the contributions are made under a SEP or SIMPLE plan.

5. For 403(b) plans only, the pre-1987 account values are grandfathered from the RMD requirements at age 70½. For these situations, the account value on Dec. 31, 1986 (if separately maintained and monitored by the custodian or issuer) is not required to be distributed until the later of either age 75 or separation from service. It is becoming increasingly common for schoolteachers and other 403(b) eligible employees to continue to work beyond age 70½ – a trend  that is expected to continue. It is important to know that contributions to a 403(b) plan can continue to be made and RMDs are not required from their 403(b), qualified plans or 457(b) plans until separation, now called “severance from employment” under EGTRRA.