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Retirement Account Penalties After Age 70

By September 8, 2008

If you offer your employees a 401(k) plan, here’s something else you should let them know. Anyone who does not withdraw money from their retirement account by age 70 ½ are subject to taxes on the account amounts. This doesn’t mean retirees have to withdraw all their money. They just need to withdraw a required minimum distribution, or RMD. If not, they can face a hefty penalty, of as much as 50 percent.

This rule not only applies to 401(k)s but to IRAs as well.

This isn’t widely known, nor is it broadcast in places where seniors with these accounts would easily find this information. Banks and financial institutions are supposed to let account holders know this information, but often it’s buried in with other information. So how do we let seniors know about the RMD?

There are a couple of things you can do. Once an employee retires, you can send them a letter letting them know about TMD and their responsibility to withdraw a portion of their retirement money every year. Additionally, if you offer a group Medicare plan, RMD notices can be sent with Medicare information, though you need to be careful which notices you bundle it with. Medicare follows HIPA compliance rules, and you have to be careful not to jeopardize a current or former employee’s personal health information. Alerting everyone to the penalties for not withdrawing retirement money can help them save on being taxed.

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