IRS Issues Retirement Planning Reminder: Required Minimum Distributions

This week the Internal Revenue Service (IRS) issued Information Release 2016-48 (IR 2016-48) as a notice to retirees who turned 70½ years old during 2015.  IR 2016-48 reminds taxpayers who reached 70½ years old during 2015 that, in most instances, they must begin drawing Required Minimum Distributions (RMDs) from their Individual Retirement Accounts (IRAs) and employer retirement plans (such as: 401(k), 403(b), and 457(b) plans) by Friday, April 1, 2016. This April 1 deadline applies to retirees who hold traditional (SEP and SIMPLE) IRAs (but not Roth IRAs), and normally to employer retirement plan participants.

Notably, the April 1 deadline is only applicable to the RMD for the first year after a taxpayer attains age 70½; for years following, the taxpayer must draw the RMD from his or her retirement account by December 31. For example, a taxpayer who turned 70½ in 2015 (born after June 30, 1944 and before July 1, 1945) must draw the first RMD by April 1, 2016, but must also draw another RMD by December 31, 2016. Further, IR 2016-48 provides additional detail about how to calculate the RMD, utilizing the retiree’s life expectancy and retirement account balance as of a certain date. Finally, IR 2016-48 notes other considerations relating to retirees with certain facts or circumstances. For instance, generally employees who have reached age 70½ but continue to work can wait until April 1 of the year after their retirement to begin drawing the RMD.

Biz&TaxHax Tip

As noted in IR 203016-48, now is a good time for retirees to think about their retirement plan. For federal tax purposes, retirees may have received Form 5498 IRA Contribution Information. Box 12b of the Form 5498 should contain the RMD amount that the retiree must draw by the applicable deadline to meet federal requirements. Additionally, as always, retirees should consider state and local tax implications related to their retirement plan distributions. For example, retirees who move from one state to another will want to consider whether their retirement income is taxable in the state where they formerly lived as well as the state to which they moved. In particular, former Ohioans who retire outside of Ohio should read our prior article titled Are Nonresident Pension/Retirement Benefits Taxable in Ohio?, which also summarizes an interesting case related to local taxation of nonresident retirement income.

It is important for Ohio retirees, including former Ohioans who have retired (or those considering retiring) outside Ohio to consult an experienced Ohio tax attorney or consultant to ensure proper tax planning based on their specific facts and circumstances. An Ohio tax lawyer or Ohio tax consultant can assist you in: determining taxability of particular items of income (such as retirement or pension benefits) for federal, state, and local tax purposes;  evaluating your specific facts and circumstances to support proper state domicile under common law; and gathering documentation to support the appropriate tax results.