On Retirement

Baby boomers reach required minimum distribution milestone for retirement accounts

The first wave of boomers turns 70½ 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 70½ 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.


Clients who were born between January 1 and June 30, 1946 — who turn 70½ 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 70½ (or 2018 if they select for the first-year delay option). Roth IRAs do not require mandatory distributions.


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.


If you are still working at 70½, 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 70½, 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 ½.


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.


IRA owners who are at least 70½ 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.


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.


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 my new ebook.)

Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.


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