For those who are 50 years
old or older and are planning for retirement, the amount of information
available about your 401(k) plan can make your head spin. This article gives
you the key items you need to know in a nutshell.
The current 401(k) contribution limits:
Pre-tax
contribution
The maximum pre-tax amount
you can contribute to your 401(k) plan account each year is determined by the
IRS.
Catch-up
contributions
If you will reach at least
age 50 during the calendar year and are making the maximum Plan or IRS pretax
contribution, you may make an additional "catch-up" contribution each
pay period. The table below shows the current "catch-up" contribution limits
imposed by the IRS.
Year |
Contribution Limit |
"Catch-up" Contribution Limit |
50+ Total Contribution Limit |
2005 |
$14,000 |
$4,000 |
$18,000 |
2006 |
$15,000 |
$5,000 |
$20,000 |
After 2006... |
The maximum pre-tax contribution limit will be indexed for
inflation, in $500 increments. |
Limits will be increased in $500 increments, as dictated
by cost of living adjustments (COLAs). |
|
Minimum required distribution (MRD)
The Internal Revenue Code established these minimums to
ensure that you actually use your Employer Sponsored Retirement Plan account
balance for its intended purpose - retirement.
Unless an earlier date is specified by your plan, you must
take your first withdrawal (MRD) according to the following table:
Age and Employment Status |
First MRD Date |
Second MRD Date |
Subsequent Years MRD |
Penalty for not following MRD |
70 ½ and Retired |
By April 1 of the year following the year in which you
reach 70 1/2 |
If you defer your first MRD payment until April 1, then
you must take your second MRD payment by December 31 of that same year. |
Must be made on or before December 31 |
50% penalty tax on the amount that should have been
withdrawn in each calendar year, in addition to regular income taxes. |
70 ½ and Employed |
By April 1 of the year following the year in which you
retire. |
If you defer your first MRD payment until April 1, then
you must take your second MRD payment by December 31 of that same year. |
Must be made on or before December 31 |
50% penalty tax on the amount that should have been
withdrawn in each calendar year, in addition to regular income taxes. |
70 ½ and 5% owner of your employer (regardless of
employment status) |
By April 1 following the year you reach age 70 1/2 |
If you defer your first MRD payment until April 1, then
you must take your second MRD payment by December 31 of that same year. |
Must be made on or before December 31 |
50% penalty tax on the amount that should have been
withdrawn in each calendar year, in addition to regular income taxes. |
The IRS issued final regulations relating to MRDs from
retirement accounts (including 401(k) plan accounts, IRAs, and 403(b) plans) on
April 17, 2002, with an effective date of January 1, 2003. The new rules
resulted in new life expectancy tables with longer expectancy factors, which
generally result in smaller required distribution amounts.
In General, your MRD is determined by dividing the adjusted
market value of your tax-deferred retirement account as of December 31 of the
prior year, by an applicable life expectancy factor taken from the Uniform
Lifetime Table.
Uniform Lifetime |
For Use by:
- Unmarried Owners,
- Married Owners Whose Spouses Are Not More
Than 10 Years Younger, and
- Married Owners Whose Spouses Are Not the Sole Beneficiaries of
their plan
|
Age |
Distribution Period |
Age |
Distribution Period |
70 |
27.4 |
93 |
9.6 |
71 |
26.5 |
94 |
9.1 |
72 |
25.6 |
95 |
8.6 |
73 |
24.7 |
96 |
8.1 |
74 |
23.8 |
97 |
7.6 |
75 |
22.9 |
98 |
7.1 |
76 |
22.0 |
99 |
6.7 |
77 |
21.2 |
100 |
6.3 |
78 |
20.3 |
101 |
5.9 |
79 |
19.5 |
102 |
5.5 |
80 |
18.7 |
103 |
5.2 |
81 |
17.9 |
104 |
4.9 |
82 |
17.1 |
105 |
4.5 |
83 |
16.3 |
106 |
4.2 |
84 |
15.5 |
107 |
3.9 |
85 |
14.8 |
108 |
3.7 |
86 |
14.1 |
109 |
3.4 |
87 |
13.4 |
110 |
3.1 |
88 |
12.7 |
111 |
2.9 |
89 |
12.0 |
112 |
2.6 |
90 |
11.4 |
113 |
2.4 |
91 |
10.8 |
114 |
2.1 |
92 |
10.2 |
115 and over |
1.9 |
Note: If the sole beneficiary for the entire year is
your spouse, whom is more than 10 years younger, then the Joint Life and Last
Survivor Expectancy Table should be used, which could reduce the MRD even
further. See
IRS Publication 590 - Appendix C for more details.
Source: IRS Publication 590 - Appendix C |
Example:
Mary is a retired 401(k)
participant who turned 70-1/2 on March 31. On December 31 of last year, the
ending balance in her 401(k) was $100,000. To calculate her MRD for this year,
divide $100,000 by her life expectancy factor of 26.5 years. Her distribution
amount is $3773.59.
Account balance
Life expectancy factor =
MRD
Thus,
$100,000
26.5
=
$3773.59
If your plan's withdrawal provisions allow, you may elect to
take more than your MRD from your retirement plan in a given year. This overage
can not be applied toward your MRD for the subsequent year. MRDs are subject to
federal income tax and may also be subject to state and local taxes. MRDs
distributions can not be rolled over into an IRA or employer-sponsored
retirement plan.
Distributions received before age 59 1/2 are subject to an
additional early distribution penalty tax of 10%, unless an exception applies.
Consult a tax professional before accessing money in your 401(k) plan.
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