Required Minimum Distribution rules for 401k accounts must be paid attention to if you’re nearing retirement.
If you’re nearing retirement age, you’re probably familiar with the concept of Required Minimum Distributions (RMDs). RMDs are the minimum amount the IRS requires you to withdraw from your tax-deferred retirement accounts each year once you reach age 73 (as of 2023). These accounts include 401(k)s, traditional IRAs, and certain other retirement accounts.
One important thing to keep in mind is that RMDs must be calculated and taken separately from each 401k account and not aggregated with your IRA accounts. You cannot aggregate the distribution from your 401(k) and IRA accounts, even if they are invested in the same assets. If you have multiple IRAs, you may aggregate the IRAs together but you cannot aggregate the RMD from a 401k account.
In addition to the aggregation rule, the required minimum distribution rules for 401k accounts require a minimum 20% tax withholding. With distributions from an IRA, you are free to set the tax withholding rate.
Collectively, the required minimum distribution rules for 401k accounts motivate most people to roll their 401k over to an IRA. The ability to aggregate the RMD from IRAs presents a powerful planning tool because it allows you to take the distribution however you decide is best. If you do decide to roll your 401k over to an IRA be sure you take any required minimum distributions for the year from the 401k before rolling to the IRA; once the 401k is rolled over the required minimum distribution rules for 401k accounts will not apply in subsequent years.
If you have specific questions we encourage you to speak with your accountant on this subject. You may also consult the IRS website on this topic. Please note, as of the date this article was written, some information on the IRS website was out of date.