Baby Boomers Boom Into Retirement
The Baby Boomers are booming into retirement and the major economic effects they have generated have already begun. As of July 1 of this year, retired baby boomers age 70.5 (born in the first 6 months of 1946) are subject to Required Minimum Distributions (RMDs).
So what does this mean? Let’s start by explaining what an RMD is. The tax-deferred benefits of many retirement plans you may have become familiar with over the years (like traditional IRAs and 401(k)s) have a time limit for how long you can defer (70.5 years to be exact). To make sure taxpayers were using the defined contribution plans as a means to secure an adequate retirement income and not simply as a way of securing tax-free wealth, the Tax Reform Act was adopted in 1986. This means that once an investor reaches age 70.5 they are required to withdrawal a percentage of their retirement accounts by December 31 each year and pay taxes on said withdrawals.
Since Baby Boomers have been investing, they have amassed $16.2 trillion in taxable U.S. retirement assets. And with 79 million Baby Boomers approaching retirement this means billions of dollars will be pulled from the markets annually. Of course this won’t happen overnight, but with the sheer size of the boomer generation they will be reaching age 70.5 at a rate of 10,000 people every day for the next 18 years.
How are RMDs calculated? There are other factors and exceptions of course, but this will be the case for a majority of retirees and I promise, it’s not as tricky as you’d think.
1. Take the account balance of each of your IRAs as of December 31 of the previous year.
2. Divide that amount by the distribution period from the IRS's life-expectancy table (most people use Table III Unified Lifetime which has a life expectancy of 27.4 for age 70).
Using the above chart, here’s an example for a 70.5 year old that, at the end of last year, had a total IRA account balance of $100,000:
$100,000 ÷ 27.4 = $3,649.64
Or you can just use an RMD calculator like the one on FINRA’s website.
So what can you do to minimize your distributions? Well if you’re one of the lucky Boomers who falls into this category there are options to help maneuver, or at the very least alleviate, the requirements.
First of all, if you’re still working at age 70.5 you’re not required to take a distribution until you leave your current job.
If you rolled any money into your IRA that you already paid taxes on or contributed to a nondeductible IRA (Roth ISA, SEP IRA, SIMPLE IRA, etc.), then those contributions are not taxed when distributed.
If you have a Health Savings Account (HSA) to help subsidize medical expenses, you can make a direct contribution from your IRA to your HSA account, as long as your total annual distribution amount is less than or equal to the maximum annual HSA contribution amount. So using our example above, if your annual distribution is $3,649.64 and the maximum annual contribution to your (family) HSA account is $6,750 you can transfer the full distribution amount into your HSA. You can only do this once, so choose wisely. For more information on whether or not this is the right choice for you, refer to this IRA to HSA worksheet from HSA Resources.
Another avenue to investigate is a qualified longevity annuity contract or QLAC. You can reduce your RMD by investing up to 25% of your IRA or 401(k), with a $125,000 maximum, in a QLAC. These do not require distributions until age 85.
Depending on the size of your distributions, charitable donations may be a viable option. If you donate up to $100,000 of your required minimum distribution each year directly to a public charity, that money is not counted as taxable income.
But what if you’re a late Baby Boomer or from another generation all together? Keep in mind that as more Baby Boomers move into retirement, the Gen Xer’s and Millennials are moving into the markets as they continue to join the work force. Their investments will help curb some of the market backlash. You can also be strategic with stocks and corporate bonds. No matter where you fall in the generational spectrum, these upcoming changes will have an impact. But staying aware of the economic climate and adjusting your investment portfolio accordingly can help you navigate these changing times.