More than 3 million American baby boomers this year will attain an important milestone: three score years and 10. And while 70 may be the new 60, Uncle Sam says that 70 is still 70, and he wants to start taxing your retirement savings.

In exchange for the opportunity to delay income tax on retirement contributions, the IRS requires that retirement accounts be depleted and taxed over the expected lifetime of the account holder. It is critical that the required distribution be taken on time, since the penalty for failing to do so is a whopping 50 percent of the required amount. Yet the rules are not universally understood, and the calculation can seem somewhat opaque. Here is a brief tutorial.

Since a "qualified retirement account" carries a tax preference specifically designed to promote saving for retirement, it makes sense that taxes cannot be delayed indefinitely. According to the IRS code, the magic age is 70 1/2. That is, most investors must start taking a required minimum distribution (RMD) each year, beginning the year in which the investor turns 70 1/2. This is generally true of most qualified accounts such as IRA, 401(k), and 403(b) accounts. There is an exception for workers who are still employed and contributing to an employer-sponsored retirement plan; the date for their first required distribution is April 1 of the year after they retire.

Holders of Roth IRA accounts are exempt from required distributions during their lifetime.

Retirees have an option to delay their first withdrawal. During the year in which the individual turns 70 , they may elect to delay the first distribution until April 1 of the following year. Thereafter, the RMD must be taken by December 31 each year. That means that if you choose to postpone the first payment, you must take two withdrawals the next year.

You may always elect to withdraw more than the minimum, and you may take it at any time or spread it over the entire year, so long as the obligation is met by year end.

The computation is actually quite simple. The IRS maintains a set of tables estimating the actuarial life expectancy for individuals based upon their current age. For example, suppose you will turn 75 during 2018. The statistical average life expectancy from the table for someone age 75 is 22.9 years.

Now suppose you held several IRA accounts with a total combined value of \$100,000 as of last December 31. Your required withdrawal is equal to the total value divided by your life expectancy, or \$4,367. Clearly, a new computation is required each year to account for the decrease in life expectancy and changes in the value of the investments. In theory, if everything followed the averages, your account would be depleted precisely during the year of your demise.

In the special case where the account holder names a spouse as beneficiary who is more than 10 years younger, a separate joint expectancy table is applied that spreads the distributions over a longer period.

Don't want to take the minimum? Sorry Charley. But you can direct part of your distribution to a favorite charity instead. As long as the assets transfer directly to the designated charitable organization, you may use your donation to satisfy the RMD and avoid taxation on that amount.

Tax-deferred investment accounts represent the lion's share of retirement savings in the US. But the tax man eventually cometh, and it is essential to understand the timing and amount of your minimum distribution. Most brokers and advisors will assist you in the computation, but the ultimate responsibility is yours, and the cost of error is high.

Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.

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