Retirement 401k

Retirement 401k - 401k Plans Made Simple

Retire On Track LLC.

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50% penalty tax on the amount that should have been withdrawn in each calendar year, in addition to regular income taxes.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50% penalty tax on the amount that should have been withdrawn in each calendar year, in addition to regular income taxes.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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