What Is the Required Beginning Date?
A required beginning date marks the date by which a plan participant must begin to receive required minimum distributions from a retirement account.
Understanding the Required Beginning Date (RBD)
Required beginning dates ensure that individuals do not hold retirement funds in their accounts indefinitely. Under U.S. law, retirement plans offer tax-advantaged investment options intended to give people an incentive to build savings. In the case of tax-deferred retirement accounts, investors can avoid paying taxes on current income by saving it. To ensure investors use these accounts for their intended purpose and to avoid creating a perpetual tax-free investment vehicle, the Internal Revenue Service (IRS) requires account holders to take distributions from their accounts.
The actual required beginning date depends upon a plan’s terms, the type of retirement plan in question and the employment status of the account holder. For individual retirement accounts, or IRAs, including SEP and SIMPLE plans, the required beginning date occurs on April 1 following the calendar year the participant reaches age 70.5. In the case of defined-contribution plans such as 401(k) or 403(b) plans, the terms of the plan may allow participants who remain employed past age 70.5 to delay their required beginning date until April 1 of the first calendar year following their retirement. The option to delay distributions until after retirement does not exist for individuals who own five percent or more of the business that sponsors the plan, however.
Individuals who fail to take the full required minimum distributions from their plans become subject to steep excise taxes on the difference between the required distribution and any distribution they did take.
Required Distributions and Inherited Accounts
Retirement account holders specify beneficiaries for their accounts in the event of their death. In these cases, the required beginning date and any existing required minimum distribution may change depending on the beneficiary’s age and relationship with the deceased account holder. Non-spouse individual beneficiaries typically must choose between taking distribution of the entire account within five years of the owner’s death or taking required minimum distributions based upon their current age. Non-spouse individual beneficiaries who opt for required minimum distributions must begin to take them within a year of the account owner’s death regardless of their age.
Spouses acting as sole designated beneficiary of a retirement plan have additional options. They may treat the account as though they owned it, using the rules for required beginning dates and required minimum distributions based upon their age. They also may take distributions based upon the age of the deceased spouse, giving the beneficiary the option to use the required beginning date for the deceased for the inherited account.