Year-end required minimum distribution planning alert for first-timers

The first baby boomers turned 70 ½ in 2016. The rules can be confusing for new required minimum distribution clients, so here are a few pointers to review with your first-timers.

Required minimum distributions begin in the year a client turns 70 ½, but that first RMD is not required to be satisfied in full until April 1 of the following year. For those who turned age 70 ½ in 2016, the RBD (required beginning date) is April 1, 2017. But that’s only for the first RMD year. For all future years, the RMD is due by year-end. For calculating 2016 RMDs, clients will use the balance in their IRAs and/or plans at Dec. 31, 2015. Let new RMD clients know that there is a 50% penalty for any amount of the RMD not taken.

Should a client take the first RMD in 2016? Generally, yes, to avoid taking two RMDs in 2017, but look at each client. For example, a client may be working this year and not next year. If income will be substantially lower next year, it might be better to take the two RMDs next year.

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It’s not all or nothing. Depending on the client’s projected tax bracket for 2016 and 2017, it could be that only a portion of the first RMD should be withdrawn in 2016 and the remainder by 2017.

For example, taking only 25% of the first RMD in 2016 can keep income from breaking into a higher tax bracket or triggering phase-outs of deductions, credits or other tax benefits. If 2017 income will be much lower, then taking the remaining 75% of the first RMD and the full second RMD in 2017 could be a more tax efficient option for both years. If only a portion of the first RMD is taken in 2016, the remainder of that RMD, the 75%, must be withdrawn by April 1, 2017. The full amount of the second RMD must be withdrawn by the end of 2017.

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Make sure new RMD clients take inventory of all retirement accounts subject to RMDs and they take the correct RMD for each type of retirement account. IRAs have special aggregation rules. The total RMD for all IRAs can be withdrawn from any one or combination of IRAs, including SEP and SIMPLE IRAs. The same aggregation rule applies to 403(b)s, but an IRA RMD cannot be taken from a 403(b) or from any other type of retirement account. If there are 401(k)s subject to RMDs, then the RMD must be taken separately from each 401(k).

Some clients, if still working for a company, can delay RMDs from the company plan of the company they are still working for, but not from any other company plan or IRA. This special exception does not apply if the employee owns more than 5% of the company. The still working exception never applies to IRAs.

Qualified Charitable Distributions were made permanent by last year’s tax law. If your client is charitably inclined, let them know that using the direct charitable IRA rollover (the QCD) eliminates that amount from income and goes toward satisfying the RMD. There is a $100,000 annual limit on this provision and the transfer from the IRA to the charity must be a direct transfer. This can only be done once the client actually reaches age 70 ½. The QCD only applies to IRAs, not company plans.

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Most clients will use the IRS Uniform Lifetime Table, but if the client’s beneficiary for the entire year is a spouse who is more than 10 years younger than the client, the Joint Life Expectancy Table, which produces a lower RMD, can be used.

Pay special attention to your first-time RMD clients and get it done right the first time.

Ed Slott, a certified public accountant, created the IRA Leadership Program and Ed Slott’s Elite IRA Advisor Group. He can be reached at irahelp.com.