Marc A. Hebert's Money Sense: Older baby boomers need to understand RMDs or face stiff penalty

By MARC A. HEBERT December 01. 2017 7:43PM


The first wave of baby boomers turned age 70½ in 2016 and reached the milestone of having to take required minimum distributions from their retirement plans. During 2017 and 2018, more will join the group. Retirement plans include traditional IRAs, Simple IRAs, SEP IRAs, SARSEPs, 401(k)s, 403(b)s, and 457(b) plans.

Contributions to these plans were usually made on a pre-tax basis and the earnings were allowed to grow tax-free. The government does not allow the tax deferral forever. Required minimum distribution (RMD) rules force the money out of the account. This usually generates income taxes on the distributed funds.

There are some exceptions. For example, people still working and not a 5 percent owner of the company might be able to delay the distributions from their current employer's plan until after they retire. Take caution here - this only applies to your current employer's plan. Some plans do not allow you to use this exception, so make sure you check with your plan administrator. For your other retirement accounts, withdrawals are still required.

While age 70½ is the magic age when you need to start taking these distributions, there is some flexibility for taking the first one. You have until April 1 of the following year to take your first distribution. For example, if your 70th birthday was in April 2017 and you turned 70½ in October, then you must take your RMD for 2017 no later than April 1, 2018.

For every year after the first year, the distribution must be taken by Dec. 31 for that year. So, continuing our example from above, the RMD for 2018 must be taken by Dec. 31, 2018. If you waited until April of 2018 to take your first distribution, you would have two amounts with mandatory withdrawals for 2018. Depending on your personal tax situation, this may or may not work for you.

Let's look at how the RMD is calculated. RMDs are based on the value of your retirement account as of Dec. 31 of the previous year. The calculation also takes into consideration your current age and life expectancy.

The IRS has defined life expectancy in tables. Most people will use the Uniform Lifetime Table. If your spouse is more than 10 years younger than you and the sole beneficiary of your retirement account, you will need to use a different table.

To calculate the RMD, you will need to divide the value of your account by the factor you find in the IRS table. It should be noted that this is the minimum amount you need to withdraw. You can always take more.

If you have multiple traditional IRAs, you calculate your RMD separately for each IRA, but can withdraw the required amount from any of the traditional IRA accounts. Similar rules apply if you participate in multiple 403(b) plans. You calculate the RMD separately for each 403(b) account, but you may make the withdrawal from only one 403(b).

These aggregation rules do not apply to 401(k) and 457(b) accounts. These cannot be aggregated, so the RMD will have to be taken from the account that it is related to.

Other rules to consider are:

. You cannot take your RMD from your spouse's retirement accounts and vice versa.

. Different rules apply to inherited retirement accounts.

. RMDs are not required for original Roth IRA owners.

. There is a penalty for failure to take RMDs. It is 50 percent of the amount that should have been withdrawn, but wasn't.

. When reviewing your RMDs, it is wise to consult your personal tax adviser to be certain you have done everything correctly.

Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at mhebert@harborgroup.com. Your question and his response might appear in a future column.


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