April’s looming income tax return deadline is on everyone’s mind these days, no doubt, but there’s another important tax date arriving even sooner. April 1 is the last day to take initial required minimum distributions (RMD) for the 2016 tax year. That’s only a few days away and since it falls on a Saturday, it’s time to take immediate action if you haven’t already done this.
There are a few exceptions, but most people aged 70 ½ years or older must take an annual distribution from traditional (not Roth) IRAs and workplace retirement plans to avoid stiff penalties from the IRS – 50% of any required minimum that you haven’t taken by the deadline! That’s your money, saved over many years of discipline and hard work, so don’t risk losing it through penalties.
Accounts affected by RMD rules include SIMPLE, SEP, 401(k), 403(b) and 457(b) types. The deadline for making mandated withdrawals from these accounts is generally the last day of the year, December 31, but the calendar is slightly different as taxpayers begin distributions for the first time.
Once you reach the age of 70 ½, you’re subject to RMD rules. If you attained that age during 2016, you must take an initial distribution from retirement accounts no later than April 1 of 2017. You’ll also need to take a 2017 RMD by December 31, 2017, and then the same date in each subsequent year.
If you’re still working and have a retirement plan through your employer, the rules of your plan may allow you to wait until you retire to begin taking distributions. (This exception would not extend to SEP, SIMPLE or traditional IRAs that you hold, however.) Certain public school teachers and employees of tax-exempt organizations may also be subject to specific rules that differ from the standard policy. Your plan administrator or employer can provide information if you fall into one of these categories.
But what if you don’t need the money? Do you have to take a distribution anyway? The answer is yes, unless you prefer to give it to the IRS in the form of penalties. But there is one bright spot. Once you are old enough that an RMD applies, you can choose to donate unneeded IRA distributions of up to $100,000 per year. In order to participate in the qualified charitable distribution (QCD) program, donated funds must be contributed to an eligible charity directly from your IRA.
The amount you must withdraw each year is calculated based on your life expectancy (figured from your birthday in the year you turn 70 ½) and the amount in your retirement account at the close of the previous year. The IRS provides worksheets and life expectancy tables to help you calculate this amount in Publication 590-B.
If you turned 70 ½ in 2016, speak to a qualified advisor immediately to ensure you’re taking all mandated RMDs. You can also learn more about IRS rules regarding RMDs on the IRS website, along with a list of frequently asked questions about this complicated set of rules.