7.13 When Retirement Benefits Must Begin

The longer you can delay taking retirement distributions from your company plan or self-employed Keogh plan, the greater will be the tax-deferred buildup of your retirement fund. To cut off this tax deferral, the law requires minimum distributions to begin no later than a specified date in order to avoid an IRS penalty. The required beginning date rules apply to distributions from all qualified corporate and self-employed Keogh plans, qualified annuity plans, and Section 457 plans of tax-exempt organizations and state and local government employers. The rules also apply to distributions from tax-sheltered annuities (7.21) but only for benefits accrued after 1986; there is no mandatory beginning date for tax-sheltered annuity benefits accrued before 1987.

You do not have to figure your required minimum distributions (RMDs). If you are not receiving an annuity, your plan administrator will determine the minimum amount that must be distributed each year from your account balance, based upon IRS regulations. The rules are similar to the traditional IRA rules (8.13).

If you do not receive your RMD for a year, a penalty tax applies, unless the IRS waives it, equal to 50% of the difference between what was received and what should have been received. The IRS may waive the penalty tax if you file Form 5329 and on an attached statement explain that a reasonable error caused the underpayment and the shortfall was or will be corrected.

Required beginning date.

Unless you are a more-than-5% owner for the plan year ending in the calendar year in which you reach age 70½, your required beginning date is generally the later of these dates: (1) April 1 following the year in which you reach age 70½ or (2) April 1 following the year in which you retire. For example, if you retired in 2011 and reached age 70½ in March 2012, you must receive your first RMD (the RMD for 2012) from the plan by April 1, 2013 and you must receive the RMD for 2013 by December 31, 2013.

If you reach age 70½ in 2012, are not a more-than-5% owner in 2012, and do not retire until 2014, your first RMD from the plan does not have to be received until April 1, 2015, the year after the year of retirement, assuming the plan does not require all employees to take the first RMD by April 1 of the year after the year of reaching age 70½.

If you are a more-than-5% owner for the plan year ending in the calendar year in which you reach age 70½, your required beginning date is April 1 of the year following the year in which you reach age 70½, even if you are still working. Being a more-than-5% owner means that you own over 5% of the capital or profits interest in the business.

However, an IRS regulation permits a plan to require all employees, and not just more-than-5% owners, to begin required minimum distributions no later than April 1 of the year after the year in which age 70½ is attained, even if they are still working.