With 2016 nearly two-thirds gone, there’s an important milestone happening this year that we almost missed: the oldest members of the Baby Boom generation have begun turning 70. And along with all the changes related to that milestone age comes another important adjustment: it’s time for many Baby Boomers to change the way they think about their retirement accounts. For the first wave of Boomers, RMD time has arrived.
“RMD” stands for Required Minimum Distribution. According to a recent article on the CNBC website, now that the first of the Boomers has hit age 70, the federal government wants to start collecting those income taxes you deferred all those years as you put money into your 401(k), 403(b) and traditional IRA’s. If you fail to take those RMD withdrawals, you’ll likely face a hefty tax penalty. You can click here to read the CNBC piece – it’s timely reading for older Boomers.
According to the IRS rules, most people holding tax-deferred retirement accounts have to start taking Required Minimum Distribution withdrawals in the year they turn 70 ½. Under the old rule of thumb the standard recommendation was to take out 4 percent per year, but that’s not how it works today. The IRS, says CNBC, has a formula based on your age and the balance in your accounts to determine how much needs to be withdrawn. That amount then becomes part of your taxable income. The CNBC article links you to some IRS worksheets and also to an online calculator that can help you figure out your RMD.
The RMD for someone age 70 is 3.65% of your balance, rising each year as you age. Here’s the kicker, says CNBC: “The stakes are high for getting RMDs right. If you don’t make the appropriate withdrawals, you may have to pay a 50 percent tax on the amount that was not taken out as required.”
Before you take any action on your own, you’ll want to check with the firm holding your retirement accounts. CNBC states that many large firms including Vanguard and T. Rowe Price will calculate RMD’s automatically for account holders and will transfer those sums to appropriate accounts to satisfy the IRS.
The CNBC piece explains how to handle multiple retirement accounts and also what to do in case you have inherited an IRA or tax-deferred account. Remember, if you’re the heir to an account on which taxes were never paid, odds are you’ll be liable for those taxes. CNBC also suggests three possible strategies for avoiding RMD, including:
• Converting retirement accounts to a Roth IRA
• Converting retirement accounts to a qualifying annuity
• Making a charitable deduction directly from a retirement account.
Are these good strategies for you? It depends on many variables, and that is why you need expert, professional advice and counsel from someone who knows the ins and outs of retirement. Here at AgingOptions, retirement and the issues that accompany it are our specialty. We invite you to contact our office any time and come in for a review of your individual situation, so we can give you the personal recommendation you’re looking for. Of course, there’s much more to retirement than good financial planning, as important as that is, which is why we always recommend an approach we call LifePlanning.
A LifePlan is a comprehensive blueprint designed to protect your assets in retirement. Your LifePlan will also help you make certain you’ve made the right legal preparations, considered the appropriate housing options, secured the necessary health insurance and informed your family and loved ones of your wishes. You can find out more about LifePlanning and get your questions answered by attending a free LifePlanning Seminar at a location near you. There’s no obligation whatsoever – only the invaluable opportunity to take a fresh look at the retirement landscape with a professional guide who knows the route. We know you’ll be very glad you attended a LifePlanning Seminar, and if you wish we’ll be happy to arrange a follow-up consultation at your discretion.
To register for a LifePlanning Seminar, click on the Upcoming Events tab for dates, times, locations and online registration. We’ll look forward to meeting you soon!
(originally reported at www.cnbc.com)