401k MRD Factors

• 401k Minimum Required Distributions, or MRDs, are a legal requirement under United States tax law. A 401k is a retirement savings plan funded by deductions from an employee's pay (plus optional employer contributions), meaning the employer does not pay tax on this income until claiming a pension. The MRD is the minimum amount that must be taken out of the plan each year in old age. It is designed to ensure that the plan is used for retirement income as designed, rather than as a way to save money tax-free with the intention of passing it on to heirs.

Age

• The MRD takes effect once a person with a 401k reaches the age of 70 1/2. Each year after this, he must withdraw at least the MRD amount for the plan, or pay a penalty of 50 percent of the MRD and become liable for income tax. There is a fresh MRD calculation each year.

Formula

• Each year's MRD is calculated based on the current market value of the 401k, which takes into account the market price of any securities that have been bought to invest the money. This amount is divided by a set figure depending on the age of the person. The figure decreases each year to represent that the person statistically has a lower life expectancy remaining. At the age of 70 1/2, the market value is divided by 27.4 to produce the MRD. If the person were to live to 115, the market value would be divided by 1.9 to produce that year's MRD. The 1.9 figure is then used for each year the person is older than 115.

Working Status

• A person old enough to be affected by MRD is exempt from the requirement each year that she is still working. (This exemption does not apply to anyone who owns more than 5 percent of the company they work for.) Once the person retires, the next year's MRD figure is usually higher than normal for that age because there is more money left in the 401k.

Marital Status

• A person who has a spouse that is 10 years younger than him and is the sole beneficiary of the 401k upon his death can divide the market value by a different figure to produce the MRD amount. This figure takes into account both partner's ages. The figure is always higher than the standard figure for a 401k owner of a particular age, meaning the MRD amount will be lower.

Dates

• MRD becomes active on April 1 following an individual's 70 1/2 age benchmark. Each year's MRD requirement takes effect from April 1, and the withdrawal must be made by December 31.