Nearly a quarter of Americans were born between 1946 and 1964, the typical definition of the baby boom generation. That is more than 75 million people. For baby boomers, the largest generation in U.S. history before the millennials, 2017 will begin a process where hundreds of billions of retirement dollars will be required to be taken as taxable distribution under the Internal Revenue Service’s required minimum distribution (“RMD”) rules. Some estimates peg baby boomer retirement account values at close to $10 billion dollars as of 2016.
In general, one cannot keep pre-tax retirement funds in a tax-exempt account indefinitely. A retirement account holder generally is required to start taking taxable withdrawals from their pre-tax IRA, SIMPLE IRA, SEP IRA, or qualified retirement plan account (i.e. 401(k)) upon reaching the age of 70½. However, Roth IRAs do not require withdrawals until after the death of the owner or his/her spouse. The main point behind the RMD rules is that the government provided the retirement account holder with an incentive to save for retirement by offering a tax deduction on the amount of the contribution as well as the ability to generate tax-deferred growth on the retirement account. If the government did not impose some distribution requirements, some people might put all of their earnings in an IRA and never take it out, thus leaving the government without a major source of tax revenue. Though, one can withdraw more than the minimum required amount
Since 2017 will be the first year that many baby boomers will be required to take RMDs from their retirement accounts, understanding the RMD rules is crucial. The required minimum distribution for any year is the retirement account balance at the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner. The RMD for any given year is the total account balance in the IRA, or IRAs, as of the end of the immediately preceding calendar year divided by a distribution period. For example, assume an IRA holder turns 70 years old in February 2017, and does not have a spouse more than 10 years younger. To determine the RMD for this year (2017), the IRA holder will need to divide the value of each IRA owned as of December 31, 2016 by the distribution figure found in the appropriate IRS worksheet referenced above. For instance, if an IRA amount at the end of 2016 was $100,000, one would divide $100,000 by 27.4(which comes from the IRS Uniform Lifetime Worksheet), for an RMD for that IRA of $3,649.64.
For IRA holders, when determining the beginning date for taking RMDs, the retirement account holder’s date of birth will determine what year the first RMD must be taken. For example, if the IRA holder’s 70th birthday was prior to June 30th 2017, the individual would have turned 70/12 prior to December 31, 2017 and, thus, the first RMD would be required to be taken by April 1, 2018 (for 2017 taxable year). Whereas, if the IRA account holder’s 70th birthday was on or after July 1, 2017, the individual would reach 701/2 in 2018. Thus, the individual would not have an RMD for 2017. The first RMD for 2018 would need to be taken by April 1, 2019. In both examples, the RMD amount would be based on the retirement account value as of 12/31 of the RMD year at question. For each subsequent year after your required beginning date, you must withdraw your RMD by December 31.
For 401(k) and other qualified retirement account holders, the plan documents will dictate when the RMD must be taken. Whereas, if the plan participant owns 5% or more of the business sponsoring the plan, then the individual must begin receiving distributions by April 1 of the year after the calendar year in which you reach age 70½. An RMD must be taken from each employer plan that you might have. For example, If one has two 401(k)s and a 403(b), the individual must take 3 separate distributions – one from each 401(k) and one from the 403(b). Whereas, in the case of IRAs, one can aggregate the RMDs. The RMD is calculated for each account and then it can all be added together and come from any one or combination of IRA accounts.
The first year following the year you reach age 70½, one will generally have two required distribution dates: an April 1 withdrawal (for the year you turn 70½), and an additional withdrawal by December 31 (for the year following the year you turn 70½). To avoid having both of these amounts included in your income for the same year, one can make your first withdrawal by December 31 of the year you turn 70½ instead of waiting until April 1 of the following year.
Failing to take a timely and/or accurate RMD can have serious financial consequences. A 50% excise tax on the amount not distributed as required would be imposed on the individual.
Many baby boomers will start experiencing the practice of taking RMDs in 2017 and will want to navigate the RMD rules carefully. Working with a tax advisor and financial advisor is recommended.
Article Created by Forbes