In 2008, the first mem­bers of the Baby Boom Gen­eration turned 62 and be­came eligible for Social Security benefits. By 2016, the same leading wave of Boomers will turn 70 and begin Required Mini­mum Distributions (RMDs) from their IRAs and similar qualified retirement accounts fund­ed with pre-tax deposits. The prospect of mil­lions of Baby Boomers making withdrawals from their retirement accounts may give RMDs a new meaning: Regulations for Massive Distri­butions.

An overview of the RMD format

The federal government does not want IRAs and similar qualified retirement accounts to defer taxation indefinitely, so tax law stip­ulates that retirement account holders must begin making minimum withdrawals once they reach age 70½. Although account hold­ers don’t have to begin distributions precise­ly on their 70½ “birthday,” these distributions must begin no later than April 1 following the year they reach that age. Thus, a person who is 70½ in June 2013 must take an RMD by no lat­er than April 2014. However, the RMD for 2014 must be made by December 31, 2014, as will distributions for successive years.

The annual RMD amount is calculated an­nually by combining the year-end values of all retirement accounts owned by the retiree, then dividing by a life expectancy factor. These fac­tors are determined by the IRS, and may be ad­justed to reflect changes in long-term interest rates and life expectancy.

The most commonly used RMD calcula­tion comes from the Uniform Lifetime Table, a portion of which is illustrated below. (Two oth­er RMD tables are used for beneficiaries of re­tirement funds and account holders who have much younger spouses.)

Using the table, here’s a sample RMD calcula­tion: If a 71-year-old has three retirement ac­counts whose total value was $275,000 on De­cember 31, 2012, the total 2013 RMD would be: $275,000/26.5 = $10,377.36.

Each year the RMD life expectancy factor declines, which means the RMD percentage will increase. However, in the early years it is possible that retirement account value could increase even after the RMD has been taken. The 2013 RMD is 3.77% of the year-end ac­count values. If the retirement account invest­ments return better than 3.77% during 2013, the year-end RMD value for 2014 would be higher. As time goes on, the declining RMD fac­tor will result in larger percentages being with­drawn, making a decline in account values in­evitable. But because RMDs are minimums, it takes quite a while for account values to de­cline; in most circumstances, RMDs won’t force retirees to fully liquidate their accounts.

Consider a $500,000 retirement account balance with RMDs over 30 years. Assuming the remaining assets delivered a 5% return an­nually, the account would continue growing for 10 years before increasing RMDs would be­gin to take down principal. Even after 30 years of RMDs, the account balance would exceed $200,000.

Like any other transaction that involves taxes, retirees with RMDs must pay atten­tion to the details. A retiree may elect to take funds from any or all of his/her retirement ac­counts, as long as the total withdrawals exceed the RMD. There are a multitude of online RMD calculators, and many financial institutions will automatically provide an RMD calculation for the assets held by their company, but the in­dividual is responsible for aggregating sepa­rate accounts and making sure the RMD has been met. The tax penalties for failing to meet the RMD regulations per www.irs.gov: “If an ac­count owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%.” Ouch. Definitely a reason to review your RMD situation with a tax expert.

You may have to withdraw it, but you don’t have to spend it

Just because you take RMD distributions doesn’t mean the funds must be spent. They can be transferred to similar financial instru­ments or used to systematically fund other fi­nancial assets. For example, some individuals who don’t need the income from their RMDs may use the distributions to pay premiums on a life insurance policy, building a tax-free inher­itance for heirs. In some instances, RMDs can be used to make mortgage payments on a home or other real estate. The deduction on mort­gage interest partially offsets the tax on distri­bution, while building equity in the property.

RMDs require annual evaluation, and may cause recipients to enter a higher marginal tax bracket. But with knowledgeable and creative assistance, RMDs may offer new and profitable financial opportunities.

Elozor Preil is Managing Director at Wealth Adviso­ry Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at [email protected] See www.wagrou­pllc.com/epreil for full disclosures and disclaimers. Guardian, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.