The Solo 401(k) Plan Required Minimum Distribution Rules
What is an RMD?
Once you reach the age of 70½, you must start to better understand the required minimum distributions (RMDs) rules. That's because, upon reaching this age, the IRS requires you to withdraw at least a minimum amount each year from all your IRAs and retirement plans—except Roth IRAs—and pay ordinary income taxes on the taxable portion of your withdrawal.
During the April following the calendar year that the owner reaches age 70½ and is no longer employed (this does not apply in the case of a business whether the owner owns more than 10% of the stock), they are legally required to take a Required Minimum Distribution (RMD), also called a Minimum Required Distribution (MRD). Distributions taken late are taxed at the rate of 50%, whereas the account owner can elect the tax withholding rate for RMDs taken on time. RMDs are partial annual payments required by the IRS. The rule is in place to ensure that retirees actually withdraw from retirement accounts rather than using them as a vehicle to pass money to heirs. The RMD amount is based on the preceding December 31 value of the account balance and life expectancy tables.
For any account with an RMD, any distribution from that account during the year will count toward that year’s RMD. You may take more than your RMD in any given year. However, amounts withdrawn in excess of your annual RMD won’t satisfy your RMD requirements in future years.
That’s because the IRS requires each year’s RMD to be calculated using the previous year’s fair market value.
Are RMD Distributions Subject to Withholding?
When you take your RMD, you can have state or federal taxes withheld immediately, or you may be able to wait until you file your taxes. An RMD distribution is not treated as an eligible rollover. If you request a rollover and an RMD is due for the year, you must satisfy the RMD before rolling over the remainder of your eligible money. In general, since an RMD is not an eligible rollover distribution it is not subject to the 20% withholding tax. Hence, there is no 20% withholding tax on an RMD, but a 10% federal income tax would be withheld on the taxable portion of your RMD. RMDs may also be subject to state taxes. However, in most cases, you may elect to have no federal or state income tax withheld or to have more than 10% federal tax withheld would apply, although it may be waived.
Satisfying the RMD Rules
The Solo 401(k) plan participant is responsible for satisfying the RMD. The Code does not permit participants to satisfy their RMD from another plan of the same type [e.g., 403(b), 401(k), etc.]. RMDs are to be satisfied from each individual plan subject to that plan’s rules for RMDs.
Calculating the RMD
RMD is calculated by dividing the adjusted market value of the account as of December 31 of the prior year by the applicable life expectancy factor, which is obtained from
the appropriate life expectancy table. The Uniform Lifetime Table is generally used to determine the RMD. If a participant’s spouse is more than 10 years younger and is the sole designated beneficiary, the Joint Life and Last Survivor Expectancy Table is used.
For example, to calculate your RMD you would do the following:
Your RMD amount is determined by applying a life expectancy factor set by the IRS to your account balance at the end of the previous year. To calculate your RMD:
- Find your age in the IRS Uniform Lifetime Table.
- Locate the corresponding life expectancy factor.
- Divide your retirement account balance as of December 31 of the prior year by your life expectancy factor.
How is the RMD calculated Upon death of the Participant – Spousal Beneficiary
Spousal beneficiary refers to the surviving husband or wife who was legally married to the originating participant on the date of the originating participant’s death. The General Board will pay the benefit to the spousal beneficiary if the participant dies before receiving a benefit or a complete distribution from his or her account, unless another beneficiary is entitled to the plan’s benefits.
When is a spousal beneficiary required to begin taking RMDs?
If the participant dies before the required beginning date, and no election was made by the required beginning date prior to the participant’s death, the spousal beneficiary will begin receiving RMDs. The spouse’s required beginning date is December 31 of the year the deceased participant would have reached age 70ó or December 31 of the year following the year of his or her death, whichever is later. Subsequent RMDs must be paid no later than December 31 of every year thereafter.
The RMD is calculated by dividing the adjusted market value of the account as of December 31 of the prior year by the applicable life expectancy factor, which is obtained from the appropriate life expectancy table.
If the participant dies before his or her required beginning date, the spouse’s life expectancy is determined using the Single-Life Table and recalculated each year that an RMD is due. If the participant dies on or after his or her required beginning date, life expectancies are determined using the Single-Life Table. The life expectancy of the participant (using his or her age in the year of death) is compared to the life expectancy of the spouse, and the longer life expectancy is used. If the longer life expectancy is that of the participant, it is reduced each year by one. If the longer life expectancy is that of the spouse, it is recalculated each year. (Recalculation generally will reduce the amount of each RMD, causing the payments to be made over a longer period of time.)
How is the RMD calculated Upon death of the Participant – Non-Spousal Beneficiary
Non-spousal beneficiaries are the persons or entities (such as estates or trusts) to whom the General Board will pay account balances if the participant dies before receiving complete distributions of his or her accounts.
When is a non-spousal beneficiary required to begin taking RMDs?
If the participant dies before the required beginning date, and if no election is made by December 31 following the calendar year of death for a distribution over the life of the non-spousal beneficiar(ies), the non-spousal beneficiar(ies) will receive the entire account balance by December 31 of the fifth year following the participant’s death. If the participant dies on or after his or her required beginning date, the non-spousal beneficiary must continue to receive RMDs. If the non-spousal beneficiary is an estate, trust or other entity, it may elect to receive the remaining benefits in a lump-sum or to defer payment until as late as December 31 of the fifth year following the participant’s death.
What life expectancy table is used to calculate the RMD?
If the participant dies before his or her required beginning date, and if the beneficiary elects to receive distributions over his or her life, the beneficiary’s life expectancy is determined using the Single-Life Table. Each year thereafter, the life expectancy is reduced by one. If more than one beneficiary shares in each RMD, the life expectancy of the oldest beneficiary is used. If the participant dies on/after his or her required beginning date, the beneficiary must continue to receive annual RMDs. The life expectancy of the participant is compared to the life expectancy of the beneficiary, and the longer life expectancy is used. Each year thereafter, the life expectancy is reduced by one.
How to Calculate RMDs with multiple retirement accounts?
If you have more than one retirement plan, you'll need to calculate the RMD of each plan separately. However, you may add the RMD amounts of all IRAs (including traditional, rollover, SIMPLE, and SEP-IRAs) and withdraw the total amount from any one or more of your IRAs. The same rules apply to 403(b) accounts.
For example, assume that you have three IRAs. Your RMDs are $3,000 from the first IRA; $2,000 from the second IRA; and $2,000 from the third IRA. If you wish, you can take $7,000 from any one or more of your IRAs to satisfy your RMD for the year.
If you have accounts in several 401(k) or other employer-sponsored plans, such as a solo 401(k) Plan, the IRS generally requires you to calculate a separate RMD for each retirement plan in which you participate and withdraw the appropriate distribution from each plan.
Work with the IRA Financial Group
Your assigned tax partner and CPA will work with you to understand and help calculate the annual RMD amounts for your Solo 401(k) plan, if applicable. For additional information on the Solo 401(k) Plan RMD rules, please contact a retirement tax expert at 800-472-0646.