Required Minimum Distributions for Baby Boomers

RMD Decision Time: What Baby Boomers Need To Know Now

July 1st, 2016 was an important milestone for the baby boomer gener­ation – the first boomers began turning age 70 ½. Those boomers with IRA and employer retirement accounts will need to make a decision about whether to begin taking minimum distri­b­u­tions this tax year or defer the first distri­b­ution until April 1st of next year. An estimated 10,000 boomers will turn 70 ½ each month for the next 18 years.

Affected boomers should start planning now to minimize the tax impact of their required minimum distri­b­u­tions (RMD). These withdrawals can push retirees into a higher tax bracket. Ideally, anyone with sizable retirement accounts should be planning way ahead of age 70 ½ to control RMDs well before they must begin taking them. Here are some quick rules to keep in mind:

  • Withdrawals from tax-deferred retirement savings accounts can be taken without penalty starting at age 59½.
  • RMDs from IRA, 401(k) and other employer sponsored plans must begin by April 1st of the year after reaching age 70½. There­after, the RMD deadline is December 31st every year.
  • Those who are still working and partic­i­pating in their employer’s 401(k) plan, may be able to defer RMDs from that account. However, they must still take them from any IRAs.
  • RMD amounts are calcu­lated using an IRS formula that is based on life expectancy. The table can be found here.
  • Penalties for not taking RMDs are steep. The IRS levies a 50% penalty on the amount you didn’t withdraw.

RMDs can have a signif­icant impact on a retiree’s tax liability. Social Security benefits are taxed based on other taxable income. RMDs could make benefits taxable resulting in a higher effective tax rate for the taxpayer. If you don’t need the money and you are chari­table, consider making your chari­table gifts each year with your RMD. This not only saves the tax on the gift, it keeps the amount donated off the front of your tax return poten­tially reducing or elimi­nating Social Security taxation.