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In 1946, approximately 3.4 million babies were born, more babies in a year than ever before. A portion of these first baby boomers will be turning 70 ½ in 2016 and will have to begin taking required minimum distributions (RMDs) from their retirement plans. It is now more important than ever that the baby boomers know when to take their RMDs, how much of an RMD to take, and consider tax planning ideas for their RMDs.

The required beginning date (RBD) for an IRA owner, i.e., the date that RMDs must commence, is April 1 of the year following the year in which the owner attains age 70 ½. For example, if a taxpayer’s 70th birthday is June 30, 2016, he will reach age 70 ½ on December 30, 2016 and his RBD is April 1, 2017. If the taxpayer’s 70th birthday is July 1, 2016, he will attain age 70 ½ on January 1, 2017 and his RBD will be April 1, 2018.

The ability to delay commencement of the RBD until April 1st does not delay other RMDs. All future RMDs must still be done by December 31 each year. For example, if Tom attains age 70 ½ in 2016, Tom can take a RMD in 2016 or he can delay his distribution until April 1, 2017. If Tom delays his 2016 distribution until April 1, 2017, Tom must then take his second RMD before December 31, 2017.

Delaying a RMD has pros and cons depending on the taxpayer’s situation. If the initial RMD is delayed and two RMDs are taken in one year, this could result in the taxpayer being taxed in a higher tax bracket. Alternatively, if the taxpayer is retiring in the year he reaches age 70 ½, it may be beneficial to delay the initial RMD so that the taxpayer is taking the RMD next year when he is in a lower tax bracket.

It is also important to consider a taxpayer’s other income when planning RMDs. Taking two distributions in the same year could cause investment income to be taxed at higher rates (capital gains and qualified dividends could be taxed at 15% rather than 0%, or 20% rather than 15%). Also, when income is increased, deductions and credits can be reduced, such as the deduction for medical expenses. Lastly, extra income could push a taxpayer into the 3.8% surtax on the taxpayer’s net investment income, which results when a single taxpayer has income over $200,000 or a married taxpayer has income over $250,000. Although deferring income may sound like a good idea to take advantage of tax-deferred growth, additional taxes could completely eliminate those benefits. Therefore, it is important to consult a tax advisor with these difficult decisions.

Calculating Your RMD

The RMD is calculated by determining your IRA balance as of the end of the year before the distribution year and dividing the IRA balance by a life-expectancy factor obtained from an age-based table. Failing to take an RMD will result in a 50% penalty on the amount that should have been withdrawn under the RMD rules, less the amount that actually was withdrawn.

Taxpayers who have multiple IRAs have additional planning opportunities available to them when it comes to RMDs. The amount of each RMD must be calculated separately for each IRA, however the RMD amounts for the separate IRAs may be totaled and the accumulated RMD amount may be withdrawn from any one or more of the IRA accounts. For example, if Dan has two separate IRAs and the RMD from IRA-A is $40,000 and the RMD from IRA-B is $20,000, Dan may take his total $60,000 RMD from either IRA-A or IRA-B. This rule applies only to IRAs that an individual holds as an owner, it does not apply to IRAs that an individual holds as a beneficiary.

Taxpayers who are age 70 ½ or older may make Qualified Charitable Distributions (QCD) to a charity directly from an IRA of up to $100,000 per year. These distributions are not subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a deduction on the tax return. These distributions satisfy the RMD requirements and should be considered by taxpayers who need to withdraw money from their retirement plans and who donate to charities. It will be more beneficial to do a QCD as taxpayers will have a lower adjusted gross income and therefore may receive more itemized deductions that are subject to limitations.

Since RMDs are included in taxable income, it is important for a taxpayer to adjust the tax withholding on an RMD. Twenty percent of the RMD is generally withheld for taxes; however this can be adjusted by filling out Form W-4P. If a taxpayer does not have much income other than the RMD, the withholding may be too high. Conversely, if a taxpayer’s marginal tax rate is 35%, then a taxpayer may be underpaid when adding in their RMD.

John Wojcik

John Wojcik is a Tax Manager and works with a variety of firm clients, including individuals, family businesses, business owners, and various corporations. John earned his bachelor's degree in accounting from Illinois State University and his MST in taxation from Northern Illinois University - College of Business.