Retirement assets cannot be protected from taxes indefinitely. Individuals who turn age 70½ this year may need to begin taking required minimum distributions (RMDs), or face substantial tax consequences.
Depending on your plan’s provisions, participants who turn 70½ in 2017 need to begin taking RMDs no later than April 1, 2018, unless they are still working. However, participants who own 5% or more of the business cannot delay RMDs even if they remain employed.
Once an individual is required to begin taking RMDs, an RMD must be taken each subsequent year by December 31st of that year. Failure to take an RMD will result in a 50 percent excise tax on the amount not distributed, in addition to the ordinary income tax due on that amount.
Here’s an example:
Strategies for Employees to Consider
Depending upon an individual’s unique situation, there are several issues to consider with regards to taking RMDs, including:
Let’s say an individual turns 70½ in 2017. He or she can delay taking the initial RMD until April 1, 2018. However, because the RMD for 2017 will need to be taken by December 31, 2018, delaying the 2017 RMD to April 1, 2018, may result in pushing the individual into a higher marginal tax bracket, resulting in a higher tax bill than if the initial RMD had been taken in 2017.
Best Practices for Plan Sponsors
To help employees meet these requirements, employers should identify all employees turning age 70½ in 2017.
Every October, PNC provides employers with a listing of participants who will reach age 70 ½ or older for approval. It is important that plan sponsors distinguish between anyone who is a 5% owner and other employees, as RMD requirements may differ.
Employers should remind employees that PNC can help individuals calculate the minimum amount they need to withdraw. Employees should be encouraged to discuss an appropriate withdrawal strategy with their personal tax advisor.
If you have questions, please contact your Account Manager.
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