Are you age 70 1/2 or older and thinking about retiring in December or January? You may want to consider the effect that required minimum distributions from your 401(k) Plan will have on your taxable income.
A tax savvy employee who has the option of retiring in December or waiting until the following January may want to consider the due dates for taking required minimum distributions when setting his or her retirement date. For example, if an employee retires on December 31, 2016 without having taken the required minimum distribution from his 401(k) account in 2016, then the employee will have to take two required minimum distributions in 2017. The 2016 distribution for the year of retirement is due by April 1, 2017, and is calculated using the employee’s 401(k) account balance as of December 31, 2015. The 2017 distribution is due by December 31, 2017 and is calculated using the employee’s account balance as of December 31, 2016.
If the employee had waited until January 2, 2017 to retire no required minimum distribution would have been due for 2016, and the employee will avoid the additional income tax due from taking two required minimum distributions in one year.
Note, this delayed distribution rule does not apply to IRAs or 401(k) accounts under a former employer’s plan.
For more information about the required minimum distribution rules, contact Deb Grace in the Troy, Michigan office at 248-433-7217.