Required Minimum Distributions: The Basics


Retirement plan sponsors take note: April 1 is a deadline for some retirement plan to take a Required Minimum Distribution (RMD) from their accounts. This can be confusing and stressful without proper planning. Here’s what you need to understand.

Receiving Distributions Can Be Stressful

RMD amounts are calculated by dividing the previous year-end account balances by the IRS life-expectancy factor. Although receiving some of our hard-won savings can be wonderful, if RMDs catch us by surprise, the funds can also be a source of stress and higher taxes too.

Timing changes under the SECURE Act in 2019, make it especially important to communicate with plan participants about RMDs now. Kiplinger provides this summary of key points:

  • Under the 2019 legislation, if you turned 70 ½ in 2019, then you should have taken your first RMD by April 1, 2020. If you turned 70 ½ in 2020 or later, you should take your first RMD by April 1 of the year after you turn 72. All subsequent ones must be taken by December 31 of each year.


  • The RMD is taxed as ordinary income, with a top tax rate of 37% for 2021.


  • An account owner who delays the first RMD will have to take two distributions in one year. For instance, a taxpayer who turns 72 in March 2021 has until April 1, 2022, to take his first RMD. But he’ll have to take his second RMD by December 31, 2022.


  • Taking two RMDs in one year can have important tax implications. This could push you into a higher tax bracket.

Older Employees?

 Keep in mind that employees who have continued to work into their seventies most likely do not need to take RMDs. This is helpful since it gives the retirement funds more time to grow, tax-deferred. Older employees who have an  “old 401(k)” from a former employer, may need some help navigating options:

 If you are still working beyond age 72 and don’t own 5% or more of the company, you can avoid taking RMDs from your current employer’s 401(k) until you retire.

However, you would still need to take RMDs from old 401(k)s you own. But there is a workaround for that. If your current employer’s 401(k) allows for money to be rolled into the plan, you could do that. Doing that means you won’t need to take an RMD from a 401(k) until you actually retire.

Stiff Penalties

Missing an RMD deadline comes with very stiff penalties from the IRS:

You could get hit with one of Uncle Sam’s harshest penalties—50% of the shortfall. If you were supposed to take out $15,000 but only took $11,000, for example, you’d owe a $2,000 penalty plus income tax on the shortfall….You can request relief by filing Form 5329, with a letter of explanation including the action you took to fix the mistake.

Protecting The Plan’s Retirement Funds—and Yours!

As a plan sponsor, you work hard to help your participants save and protect their funds. One day, you’ll retire too—so don’t forget to protect your personal assets as well! Any individual involved in the management of a retirement plan can face personal exposure for breach of a fiduciary duty.  Even allegations of a fiduciary breach can divert attention and resources from your work, life—and retirement plans.

Ouch! If you find yourself in need of an attorney who specializes in ERISA law, you could find yourself paying upwards of $600—for just one hour!  Avoid this possibility—and a lot of other stress—with Colonial Surety Company’s affordable Fiduciary Liability insurance.

 Available with a complete ERISA Bond Package, a whole year of Fiduciary Liability coverage is less than what you’d pay for one hour with that lawyer if a crisis hits. Plus, Colonial’s 2 and 3 year packages also include Cyber Liability coverage to protect your business and retirement plan in the event of a cyber breach.

Remember: the required ERISA bond protects the assets of the retirement plan from theft; Fiduciary Liability coverage protects you and your assets from personal liability; and, Cyber Liability coverage  can safeguard your company and plan from covered losses and expenses in the event of a cyber breach.

With Colonial, you can easily and affordably secure this complete coverage package.

ERISA Bond Package With Fiduciary Liability Coverage


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