IRA Vs. 401k Minimum Distributions
An individual retirement account (IRA) is owned by an individual or jointly by spouses. They put their money in a secure plan to be used in retirement. A 401k is a plan created by a business for its employees. Some 401ks only allow employees to put savings away for retirement, other 401k plans include a matching contribution (generally less than 3 percent) from the employer.
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Minimum Required Distributions
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IRAs require minimum required distributions (MRDs) begin by April 1 of the year following the year that the account owner turns 70½. MRDs are given monthly or yearly. Meaning that if Jill turned 70 in January 2010, she would begin to receive distributions by June 2011. 401ks can be distributed either in a lump sum or periodic (annuity or installment) payments. MRDs begin April 1 in the year after the later of any of these events: the participant reaches age 70½ or the participant retires or the plan requires distribution the year after the participant reaches 70½, even if not retired. This means that if Jack turns 70 in January 2010, he could begin to receive distributions by June 2011. But, if he retires in 2012, then he will start getting distributions April 1, 2012. This is assuming the plan does not state he must start getting distributions at 70½, regardless of working status. IRAs have no exceptions like this.
MRD Calculations
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In an IRA, the required minimum distribution per year is determined by dividing the account balance (as of Dec. 31 of the prior year) by the number known as the applicable distribution period or life expectancy. The account holder can identify her distribution by using the Tables in Appendix C of IRS Publication 590. Table I is for beneficiaries. Table II is for account owners who have spouses who are both the IRA's sole beneficiary and who are more than 10 years younger than the IRA owner. Table III is for an IRA account owner in any other circumstance.
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IRA MRD Example
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This means that if Jack has $10,000 in an IRA and is 75 years old. His wife, Jill, is his sole beneficiary and one year younger. Therefore, according to Table I, they would have a minimum distribution (that year) of $746.27 ($10,000 divided by 13.4). The following year, the IRA has $9,253.73. In this year, Jack is 76 and we therefore use 12.7, so they would receive $728.64.
MRD Calculations For a 401(k)
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Sites such as www.research401k.com give the equivalent table to calculate 401k MRD. Values are different, so calculations for an IRA and 401k are not equal. For example, on the Uniform Lifetime Table, if Jill, the 401k account owner, is 75 years old and the 401k contains $10,000 and she chooses to get a minimum yearly distribution, she will receive $436.68 ($10,000 divided by 22.9). The next year, she is 76 and the account is down to $9,563.32. This means Jill will receive $434.70. If your spouse is the account owner, more than 10 years younger than you and you are the sole beneficiary, upon your spouse's death, you would calculate MRD via the Joint Life Expectancy Table which contains different values.
MRD Flexibility
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IRA owners that do not begin taking distributions at 70½ may suffer taxes and fees. With a 401k if you continue to work beyond 70½, and the plan administrator requires you to begin taking distributions at 70½, you can still defer MRDs to April 1 of the year after you officially retire. However, this is only possible if you don't own more than 5 percent of the company you work for, such as via stock or partnerships.
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