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Under IRS regulations your client must begin receiving distributions from retirement
plans by April 1 following the year they turn 70½, if your client is no longer working -- or
following the year they retire, whichever is later. The requirement applies to 401(a), 401(k), 403(a), 457(b)
and 403(b) plans. People who fail to satisfy minimum distribution requirements are subject to a tax
penalty equal to half of the entire amount that should have been distributed.
By the appropriate deadline and by every December 31 thereafter, a client subject to minimum
distribution requirements must take at least:
- A calculated single-life or joint-life annuity payment. (Important: Naming an annuity partner or a
beneficiary who isn't a spouse may activate a second set of rules that can further limit income
choices.)
- Payments based on the expected lifetimes of your client or your client and his/her annuity partner:
These may well start out lower than lifetime annuity payments, but there's no guarantee your client(s)
won't outlive the income stream.
Clients who work past age 70½ can postpone taking income from their current employer's 403(b) or
qualified plan until April 1 after the calendar year in which they retire. They can also put off
receiving income from previous employers' plans if all their accumulations from both current and past
employers are in a single contract. To do this they must roll over the former employer plan accumulation
into the current employer's plan. The current employer's plan, however, is not required to accept
rollovers. If previous employer plans are not rolled over into their new employer's plan, the client
must begin drawing a minimum distribution from them.
Grandfathered Amounts
Standard minimum distribution requirements don't apply to funds accumulated in a 403(b) plan before
January 1, 1987 -- the "grandfathered" portion of an accumulation. Pre-1987 money can stay in the plan
until your client reaches age 75. But if he/she rolls over pre-1987 403(b) funds to an IRA or a qualified plan, the
"grandfathered" status is lost.
There are no grandfathered funds in a qualified plan or IRA. Anyone participating in qualified 403(a), 401(a),
and/or 401(k) plans must begin distributions on the total accumulation as of
separation from service or attaining age 70½, whichever is later.
Calculation Methods
The amount of the required minimum distributions is calculated using the life expectancy of your client and
a beneficiary and his or her current accumulation balance as of each December 31.
Survivor Benefits
If your client should die before beginning income, his/her benefits are still subject to minimum
distribution requirements.
If your client's beneficiary is his/her spouse, the date by which such payments must be made is
either the December 31st of the year after the year your client dies, or December 31st of the year your
client would have reached age 70½ (whichever is later). When combined with the surviving spouse's
right to roll over death benefits and choose to use his/her own calculation beneficiary to determine
minimum requirements, the rule allows for significant postponement of distributions.
If your client's beneficiary was anyone other than a spouse, distribution of the entire benefit
must begin within a year of your client's death as a lump sum or as a lifetime annuity or
an annuity over a period not exceeding the beneficiary's life expectancy.
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