Many workers are staying in jobs past traditional retirement age, and the rules regarding distributions at age 70 ½ can be complicated. Plan participants can make contributions and take required minimum distributions at the same time. As an employer, you’re required to continue making contributions for an employee as long as they are employed and participate in your plan. Here are IRS guidelines that you need to know and follow:

When to distribute:

-         Required minimum distributions (RMDs) are required at age 70 ½ or the year in which the participant retires (if after age 70 ½).

-         In the case of a SIMPLE IRA, SEP or if the participant is at least a 5% owner, RMDs must occur at age 70 ½, regardless of retirement status.

How to calculate required minimum distributions:

-         Generally, the value of the retirement plan or IRA on December 31 of the prior year is divided by the life expectancy of the plan participant.

-         Life expectancy is determined by one of three tables in Publication 590 (Appendix C), based on marital status and age difference of spouse.

When to schedule payment:

-         Participant must take the first RMD by April 1 of the year following age 70 ½ or retirement.

-         In the following years, the participant must take the RMD by December 31, including the year that the distribution was taken by April 1.

Additionally, you must also give your employee the option to continue deferring salary after age 70 ½, if permitted by your plan.

What’s your guess? Did the percent of employees contributing to IRAs in 2010 rise or fall vs. 2009? If you said ‘increase,’ you’re right. According to a study conducted by the Principal Financial Group in October,* 85% of survey respondents contributed to 401(k) plans in 2010 vs. 81% in 2009. And, the contribution amount is increasing by a larger share as well.

• 18% of respondents increased the contribution amount in 2010, compared to 13% in 2009. Factors driving the increase are a growing uncertainty about Social Security, combined with an optimistic view of the future.  
• 45% of the survey’s workers and 43% of retirees indicate that they are very or extremely concerned about the future of Social Security.  Saving more in a retirement account means that they will be less likely to rely on Social Security as the primary source of income.
• The survey also showed a growth in positive outlook for the economy and personal finances from the third quarter to the fourth quarter 2010. 40% of workers and 39% of retirees believe that the economy will improve in 2011.

For plan sponsors, your 401(k) is an important benefit for employees. Making sure that your investment choices are well-researched and managed can go a long way toward increasing employee satisfaction and confidence.

Happy New Year!

*Source: The Principal Financial Group Well-Being Index (SM) – Summary 4th Quarter 2010