“RMD (MRD)”: what, when, and why?

​MRD, or RMD as they are sometimes called, refers to the minimum required distribution that a participant in a tax favored plan must take annually from their tax favored retirement plan. These tax favored plans were created to provide income to participants during their retirement not to provide taxpayers with a tax deferred savings vehicle for life.

In a tax favored plan, the participant is able to invest the participant’s contributions to the plan AND those amounts that would have been paid to the IRS as income taxes if the funds were not in a tax favored plan. To ensure the plan is used for the participant’s retirement and that the IRS is paid the taxes owed on the account, the IRS requires the participant to begin taking annual distributions from such retirement plan when the participant reaches 70 ½ years of age (or death if earlier). The IRS enforces the RMDs by imposing a 50% penalty on those amounts that should have been distributed but which were not.

RMDs are required from qualified plans, such as 401Ks, IRAS and 403(b) plans. Unlike regular IRAs, Roth IRAs do not require RMDs while the participant is alive. However, once the ROTH IRA participant dies, the beneficiary of the ROTH IRA will be subject to the RMD rules.

Because taking the RMDs from qualified plans may result in reducing available funds to a point where there are insufficient funds to meet living expenses, the IRS has approved qualified longevity annuity contracts (“QLAC”) that can be purchased within qualified plans. The value of a QLAC and its annuity payments are not subject to the RMD rules and can allow a participant security that sufficient funds will be available to pay retirement expenses if the participant lives beyond age 85.

 

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