RMDs for Business Owners and EmployeesSubmitted by Mission Financial Planning on July 11th, 2016
Updated for the new SECURE Act: For any individual born after June 30, 1949, the required beginning date for Required Minimum Distributions (RMDs) is April 1 of the year after the year in which such individual reaches age 72 (or, in the case of certain plans, if he or she is still working, after the year in which he or she retires if later). Previously, the trigger age was 70½.
COVID-19 UPDATE: As of 3/28/2020, RMDs can be suspended for 2020 for those who prefer to leave that money invested.
Required Minimum Distributions (RMDs) from 401(k)s are treated differently for business owners. For those who don’t own a business or own less than 5% of the business, an RMD is not required from the 401(k) while they’re still working (they would still have to take RMDs from their IRAs, however). Their first RMD (as a non-owner) would be due April 1st of the year after they retire.
However, most of our clients are dentists who own their practice, and as >5% owners they are treated differently; they fall under an exception and cannot delay 401(k) RMD’s past age 72.
To avoid the tax whammy of a taxable RMD on top of income from the practice, we usually encourage clients to continue to make 401(k) contributions even though they are also taking RMDs. It’s a bit like a revolving door, money going out and money coming in, but it helps manage the tax consequences to some extent.
If the sale of a client's practice coincides with the timing of their first RMD, delaying RMDs into the following year might be a useful strategy. We will address when RMDs are allowed to be delayed in another post - this is a strategy that must be carefully considered due to potential the tax impacts.
Other posts in the RMD series cover
- RMD Basics
- Thinking About RMDs Before You Turn 70
- How RMDs Work In Real Life
- Special Situations – exceptions to the rules
- Making Charitable Donations with your RMD
- Roth IRAs and RMDs
- Pitfalls of RMDs – some things to be extra careful of when you’re RMD aged.
- RMD Strategies
- What Happens When You Forget an RMD
Circular 230 Disclosure: In compliance with the requirements imposed by the IRS pursuant to IRS Circular 230, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.