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Did You Turn Age 70 and a Half in 2016? Have an IRA? An Important Deadline Is Rapidly Approaching for You.

March 21, 2017

Did You Turn Age 70 and a Half in 2016? Have an IRA? An Important Deadline Is Rapidly Approaching for You.

March 21, 2017

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We all are aware of the importance of the April 18 tax deadline; however, April 1 is also a significant date for those who turned age 70½ in 2016. This milestone means you are now required to start taking minimum annual distributions from your traditional IRAs. The minimum distribution requirement does not apply to Roth IRAs, but does apply to company retirement programs, such as 401(k), 403(b) and 457(b) plans. And if you are already retired, you also must begin making withdrawals from your company retirement plan.

If you do not take these minimum distributions as the law proscribes, you could be subject to a huge penalty tax, which is 50 percent of the excess of the minimum amount that should have been distributed over the amount actually distributed. Keep in mind that even if take your first required distribution by April 1, 2017, because you turned 70½ in 2016, you are still required to take your second distribution (and all distributions thereafter) by December 31 each year, starting with December 31, 2017. The annual amount of the required distribution is determined by dividing the account balance, as of the end of the preceding year, by the life expectancy factor from a uniform table. This table is used in all cases, except where the account’s designated beneficiary is the account owner’s spouse and is more than 10 years younger than the owner, in which case a joint life and last survivor life expectancy table is used.

When Must Minimum Distributions Begin?

If you reach age 70½ in 2017, you have until April 1, 2018 (known as the required beginning date) to take your first year's distribution, namely the one for 2017. Even if you have already been taking distributions before reaching age 70½, you must begin calculating and receiving required minimum distributions by the mandatory beginning date. Interestingly enough, waiting until 2018 to take this distribution may be an effective tax planning technique, if you believe your 2018 tax rates may be lower than 2017 rates. We believe there is a good chance rates will decrease under President Trump’s tax plan, which we discussed in a previous Alert. That's because you'll also have to take your second year's annual minimum distribution in 2018, since the extended deadline until April 1 is available only in the first distribution year when you reach age 70½. However, you should balance this with a potential larger tax on Social Security benefits in 2018 and larger cutbacks for deductions (such as for medical expenses) that have an adjusted-gross-income-based “floor.” Effective tax planning is extremely important here.

Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, in certain cases, some people with workplace plans can wait longer to receive their distributions. Employees who are still working usually can, if their plan permits, wait until April 1 of the year after they retire, regardless of age, to start receiving these distributions.

It is important to note that you may take more than the required minimum distribution, but you will not receive credit for the additional amount when determining the minimum required distributions for future years. This means that if you receive more than your required minimum distribution in one year, you cannot treat the excess (the amount that is more than the required minimum distribution) as part of your required minimum distribution for any later year. However, any amount distributed in your 70½ year will be credited toward the amount that must be distributed by April 1 of the following year.

The decision whether or not to accelerate minimum distribution payouts and whether to take more than the minimum distribution, which is permitted, are not easy decisions, and the best choice is not always clear. Taking your overall financial picture into account is an important part of the planning process, and timing is critical.

For Further Information

If you would like more information about this topic or your own unique situation, please contact Steven M. Packer, CPA, or the Tax Accounting Group practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page located here.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.