How can I avoid Required Minimum Deductions (RMDs)?
I just learned that with a Roth 401(k), one pays no tax on the growth but is required to begin making RMDs at 70.5 years old. Should you have two separate IRAs so the balances do not mix? I want to avoid RMDs for both my Roth IRA and a Roth 401(k) accounts.
The only time you owe RMDs on your 401(k) after you are age 70.5 is after you stop working. If you do not own more than 5% of the compnay, you never have to take RMD’s from your 401(k), whether Roth or Traditional.
You do NOT have to take RMDs out of Roth IRAs (ever) during your lifetime.
Therefore, if you have retired and/or left your employer, you can roll your Roth 401(k) into your Roth IRA and then you will NOT need to take any RMDs...after Retirement, Roth 401(k)’s require RMDs, but not Roth IRAs.
Hope this helps!
A Roth IRA does not have RMD (Required Minimum Distributions) requirements except in some cases when it is inherited.
With a Roth 401K, if you are retired or are a 5% owner of the company, you have to begin taking RMD at age 70.5.If you are not retired and not a 5% owner you don't have to take a RMD.
Distributions do not incur taxes if account is over 5 years old and you are over 59.5 years.
If you want to avoid RMD on your Roth 401K (If retired or a 5% owner)), then you should roll it over to a Roth IRA. The rollover, if done properly will not incur any taxes and you don't need to take an RMD on the Roth IRA.
If you have both a regular 401K and a Roth 401K then the the regular 401K can only be rolled over to an IRA, if you want to avoid taxes on the rollover. You will have to take RMD on the regular IRA. The Roth 401K can be rolled over to a Roth IRA as disussed above.
While Roth IRAs do not have Required Minimum Distributions (RMDs), Roth 401K plans do. If you are retired or separated from service at your employer, you should be eligible to roll over the Roth portion of your 401k to your Roth IRA and no longer have RMDs. There is more to this than you might think so you might want to read an article I wrote called ROTH IRA CONTRIBUTION LIMITS – ROLLOVERS AND DISTRIBUTIONS.
The ability to save in a Roth 401k has been around since the Pension Protection Act of 2006. This act allowed businesses (plan sponsors) to offer employees the option to defer their after tax salary into an account that will allow for tax free withdrawals in retirement. For more information you could read ROTH 401K PLANS: 5 THINGS YOU NEED TO KNOW.
Roth IRAs are powerful retirement planning tools and they should not be ignored. That isn’t to say Roth IRAs are better than tax deferred accounts like 401(k), 403(b), and traditional IRAs. It is not about which one is better as much as it is about understanding the differences. Roth IRAs are an important part of the retirement planning process. If you’re looking to take your retirement portfolio to the next level, give them a look. I wrote an article called ROTH IRA: 5 THINGS RETIREMENT SAVERS MUST KNOW that you might find helpful.
Please note that this should not be considered investment advice and is only educational in nature. Be sure to consult your own investment, tax, or legal professional for help with your specific situation.
David N. Waldrop, CFP®
As long as you're still working for the employer that's sponsoring the plan, you do not need to take RMDs from the plan. But most folks are not working and contributing to a retirement plan at age 70 or more (although I've had three clients in my practice who have worked past that age and were conributing).
Assuming you are or will be retired by that age, you will need to take RMDs from both a traditional and Roth 401k. The good news is that the withdrawals from the Roth 401k are not taxable.
To completely avoid the RMD rules on the Roth 401k, you can roll the balance out of the employer-sponsored plan into your own Roth IRA. You can do this once you're no longer working for that employer. To keep the record-keeping simple, you should be sure to keep your tax-deferred money from your traditional 401k separate from your after-tax money from your Roth 401k. Roll the proceeds of each into their own respective accounts: Traditional 401k into a Traditional IRA and Roth 401k into a Roth IRA. You may combine the Roth 401k proceeds into any other existing Roth IRA in your name.
ROTH IRAs and ROTH 401(K) are similar but not exactly alike. Required Minimum Distrubutions are one of the major differences.
At some point in the future the wonderful government may force you take to take required minimum distributions (RMDs) once you turn 70.5 years old. These rules do not apply to ROTH IRAs, and this has led many people to mistakenly believe that that same rules apply to ROTH 401(K). Don’t be fooled, required minimum distributions are required from ROTH 401(K) assets. Of course if you are no longer working for an employer you can rollover your ROTH 401(K) to a ROTH IRA (discuss the pros and cons with your fiduciary financial planner) and no longer be forced to take RMDs.
Bottom line- if you are approaching 70.5 looks to get as much of your ROTH 401(K) money into a ROTH IRA - to avoid RMDs. If you are still working- you will not be required to take RMDs from the 401(K) account at your current job. Their are some restrictions to this so make sure to review with your fiduciary Certified Financial Planner before skipping RMD distributions.