Retirement 2.0blog

Baby boomers reach required minimum distribution milestone for retirement accounts

The first wave of boomers turns 70 starting July 1, and must start taking distributions from their retirement savings

Jun 20, 2016 @ 10:00 am

By Mary Beth Franklin

The first of wave of baby boomers will hit an important milestone beginning July 1. Those earliest boomers born at the start of 1946 will turn 70 in mid-summer, and will be followed at the rate of 10,000 people per day for the next 18 years.

Uncle Sam will have his hand out — not to applaud the generation's half-birthday but to collect income taxes from their retirement account distributions that have finally come due. It seems like a good time to review some basic distribution rules for IRAs, 401(k)s and other types of retirement savings plans.

SPECIAL FIRST YEAR RULE

Clients who were born between January 1 and June 30, 1946 — who turn 70 this year — can choose to take their first required minimum distribution from their traditional IRAs (including SEPs and SIMPLE IRAs) by Dec. 31, 2016, or delay until April 1, 2017. But if they decide to take advantage of the April 1 deadline that is available only for first-year distributions, they will have to take their second RMD by December 31 of that same year. That could substantially boost their taxable income for 2017 and possibly boost their Medicare premiums, too. Going forward, they must take an annual distribution by December 31 each year or face a 50% penalty on the amount they failed to withdraw.

Clients born between July 1 and Dec. 31, 1946, are not required to begin mandatory distributions from their retirement accounts until 2017, when they turn 70 (or 2018 if they select for the first-year delay option). Roth IRAs do not require mandatory distributions.

HOW TO CALCULATE RMDs

Take the account balance of each IRA as of December 31 of the previous year and divide that amount by the distribution period from the IRS's life-expectancy table in IRS Publication 590-B. Most people use Table III (Unified Lifetime) which has a life expectancy of 26.5 for age 71.

But if the sole beneficiary of your IRA is your spouse who is more than 10 years younger than you, you can use a different IRS table, Table II (Joint Life and Last Survivor Expectancy).

If you have more than one IRA, you must add up all of the required minimum distributions from each account, but you can choose to take all of the distributions from one or more accounts. If in any year you take out more than the required amount for that year, you will not receive credit for the additional amount when determining the minimum requirements for future years.

SEPARATE RULES FOR 401(k)s

If you are still working at 70, you don't have to take a distribution from your current employer's 401(k) plan until you leave your job. Although you cannot contribute to a traditional IRA once you turn 70, you can continue funding a 401(k) plan if you keep working beyond that age (unless you own 5% or more of the company). However, once you stop working, you must begin your annual required minimum distributions and can no longer fund your employer-based retirement plan.

If you have multiple 401(k) plans, you must calculate a separate required minimum distribution from each employer plan and you must take a distribution from each plan each year once you turn 70 .

TAXES

Distributions from traditional IRAs, 401(k)s and similar workplace-based retirement plans are fully taxable in the year of distribution at ordinary income tax rates, assuming all of your contributions were deductible. If you made nondeductible contributions or rolled over any after-tax amounts, you have a costs basis and the nondeductible contributions are not taxed when distributed. In that case, each distribution is partially nontaxable and partially taxable until all of your basis has been distributed.

DONATIONS

IRA owners who are at least 70 can avoid taxes by donating up to $100,000 of their required minimum distribution each year directly to a public charity. For married couples, each spouse can direct some or all of their RMD up to $100,000 per person directly to a public charity. Donor-advised funds and private foundations are not eligible. Although the direct-IRA donations do not qualify for a charitable deduction, the money is excluded from taxable income.

CONSIDER A QLAC

You can reduce your required minimum distribution by investing up to 25% of your IRA or 401(k), up to a maximum $125,000, in a qualified longevity annuity contract. A QLAC is a deferred income annuity that begins paying out at a later date but must begin distributions by age 85. The money in the QLAC is not included in the RMD calculation.

ONE-TIME TRANSFERS TO AN HSA

You may be able to make a qualified funding distribution from your traditional IRA or Roth IRA to your health savings account. The one-time distribution must be less than or equal to your maximum annual HSA contribution, and it must be made directly by the trustee of the IRA to the trustee of the HSA. The distribution is not included in your income, but it cannot be deducted as an HSA contribution.

(Questions about new Social Security rules? Find the answers in )

Mary Beth Franklin is a contributing editor to arjuna-design and a certified financial planner.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join arjuna-design at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

All of the noise in the District of Columbia is distracting your clients. Ben Phillips of Event Shares explains what deserves your attention (and what doesn't) as we head into 2018.

Recommended Video

Channels

Latest news & opinion

Wells Fargo, Morgan Stanley use contrary tactics to keep advisers

Wells is helping brokers transition to independence within the firm, while Morgan is taking them to court.

Goldman's measure of risk appetite hits record

Global stocks and U.S. Treasuries are seeing their most "extreme" start to a year ever, bank says.

Wells Fargo erasing hurdles for advisers looking to move to its IBD

If advisers commit to staying at FiNet for a two-to-three year period, they will not have to pay Wells the fees it currently charges advisers switching channels.

El-Erian warns advisers on ETF liquidity

If investors decide to exit exchange-traded funds en masse, things could get nasty, economist says.

Pass-through provision in new tax law could benefit REITs, MLPs

Investors in such instruments are eligible for a 20% tax deduction as a result of the pass-through provision.

X

Hi! Glad you're here and we hope you like all the great work we do here at arjuna-design. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting arjuna-design.com? It'll help us continue to serve you.

Yes, show me how to whitelist arjuna-design.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Last News

social security estimator of benefits social security benefit estimate fockx caterpillar 401k benefit resources hewitt transamerica net worth distribution code on 1099-r ira withdrawal age 55 hewitt resources caterpillar fidelity ira calculator jp morgan private wealth management salary how much money is hugh hefner worth is a 1942 nickel worth anything vanguard no load mutual funds best difference between grantor and non grantor trust good cheap stocks to buy right now sign up for medicare at 65 morgan stanley smith barney client services social security early retirement income limits to err on the side of caution american funds capital income builder c invesco money market fund class a roll over ira to 401k oppenheimer international bond fund a aon hewitt investment consulting ridgeworth small cap growth fund i non spouse beneficiary ira pimco total return fund institutional class managed account advisors merrill lynch is transamerica life insurance good vanguard wellesley income fund review minimum required distribution 401k