Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Turning Age 70 1/2 and Required Minimum Distributions

When it comes to taxes, reaching age 70 ½ is an important milestone. That’s because you have to start taking annual required minimum distributions from your traditional IRAs when you reach age 70 ½. And if you’ve already retired from your company, you also must begin making withdrawals from your company retirement plan as well. If you don’t take these minimum distributions when you’re supposed to, you could get hit with a 50% penalty tax.

When must these minimum distributions begin? If you reach age 70 ½ in 2015, you actually have until April 1, 2016 to take your first year’s distribution, namely the one for 2015 (your age 70 ½ year). However, if you wait until 2016 to take this distribution, you may wind up loading too much income into 2016. That’s because you’ll also have to take your second year’s annual minimum distribution in 2016, since the extended deadline until April 1 is available only in the first distribution year. That could have unpleasant tax consequences. For example, you may be pushed into a higher tax bracket in 2016. Additionally, you may be hit with a larger tax on social security benefits in 2016, and saddled with larger cutbacks for deductions (such as for medical expenses) that have an adjusted-gross-income-based “floor”.

The decision whether or not to accelerate minimum distribution payouts is not an easy one, and is not necessarily the best choice. Be sure to reach out to your advisers and discuss your options, while taking into account your overall financial picture. Have them help you determine whether you’d be better off beginning required distributions this year, instead of next.

By Jeremy Smith, CPA