BOSTON —This year, many boomers–those born in the first half of 1946–will reach a critical milestone: age 70 ½. Even though most probably haven't marked their half birthday since grade school, 70 ½ is the age when the IRS generally requires individuals to begin withdrawing funds from traditional IRAs, 401(k)s or 403(b)s. This is an important deadline that can have expensive consequences if it's missed—in fact, ignoring the minimum required distribution (MRD) deadline can mean a 50 percent penalty of the amount required to be withdrawn.
"Adding to this is the fact that rules around MRDs can be confusing," said Maura Cassidy, vice president, Retirement, Fidelity Investments. "It's important for boomers to begin to shift their mindset from contributing to a traditional IRA to taking distributions. Since the law bars contributions to traditional IRAs starting at 70 ½ and begins to require distributions, this can be a significant change for individuals. Taking time to be prepared can help ease this transition and make for a smoother process in year one and beyond."
To help make taking that first MRD less confusing for boomers, Fidelity Investments® suggests that retirees keep the following in mind:
- Understand the MRD calendar rules: First-timers can generally wait to take their first year’s MRD payout until as late as April 1 of the year following the calendar year they turn 70 ½, but subsequent years MRD payments must meet the December 31 deadline each year or face a hefty penalty. Keep in mind, those first-timers postponing the initial MRD until the following year means that two distributions need to be taken in the second year, which could possibly push a retiree into a higher tax bracket and impact income based benefits a few years later.
- Calculating your MRD: The total MRD can be withdrawn from a single IRA or spread out over several. To figure out exactly what's owed, an MRD calculator can be helpful to determine the annual minimum distribution amounts. (Please note: there are slightly different rules for defined contribution plans such as 401(k)s. For those who have more than one workplace retirement plan, the MRD must be determined for and distributed from each. However, if you are still employed by the employer sponsoring the plan, you may be able to delay beginning MRDs until April 1st of the year following your retirement.)
- Consider giving the MRD to charity: Last year, Congress passed a bill making qualified charitable distributions, or QCDs, from traditional IRAs permanent. Instead of taking an MRD, the money can be donated – up to $100,000 per taxpayer – directly to a qualified charity. This amount counts as an MRD without increasing one's adjusted gross income. Certain rules apply so make sure any QCDs rules are followed.
- By the way, you're not required to spend your MRD: Boomers shouldn't feel compelled to spend the money once it comes out of the IRA. Instead, it can always be directed to a non-retirement account and reinvested.
- If Needed, Seek Advice from a Professional: While meeting these deadlines are particularly important, it can help to secure tax advice from a professional, who can provide guidance on the process and ultimately help calculate how much is owed in taxes.
To help educate the millions of retirees who must take MRDs, including first-time boomers, Fidelity offers a variety of resources, such as Viewpoints articles about taking MRDs by the deadline and how to include MRDs as part of an overall retirement income strategy; answers to frequently-asked questions about MRDs and an infographic outlining important IRA Tax Forms & Key Deadlines; an MRD calculator to help determine annual minimum distribution amounts; and access to Fidelity's online Retirement Distribution Center, which estimates each account's MRD and allows customers to set-up, track and manage IRA withdrawals. Fidelity's Learning Center also has a "Making Sense of MRDs" video, a "Getting Ready for MRDs" checklist and "To delay or not to delay? Options for taking your first Minimum Required Distribution (MRD)" article.
About Fidelity Investments
Fidelity’s goal is to make financial expertise broadly accessible and effective in helping people live the lives they want. With assets under administration of $5.6 trillion, including managed assets of $2.1 trillion as of July 31, 2016, we focus on meeting the unique needs of a diverse set of customers: helping more than 25 million people invest their own life savings, nearly 20,000 businesses manage employee benefit programs, as well as providing nearly 10,000 advisory firms with investment and technology solutions to invest their own clients’ money. Privately held for nearly 70 years, Fidelity employs 45,000 associates who are focused on the long-term success of our customers. For more information about Fidelity Investments, visit https://www.fidelity.com/about.