You must start taking mandatory annual withdrawals from your traditional IRAs once you turn age 70½. This includes any simplified employee pension (SEP) accounts and SIMPLE IRAs that you set up as a small business owner.

These mandatory IRA payouts are called required minimum distributions (RMDs). And if you fail to take timely distributions there’s a penalty.

Taking RMDs, unfortunately, will also cause you to report additional taxable income on your federal income tax return. This will increase your federal income tax liability and possibly your state income tax liability, if applicable. Here are the rules regarding RMDs and a tax-smart strategy for meeting your RMD obligations.

If You Hit the “Magic Age” in 2016

Your first RMD must be taken by no later than April 1 of the year after the year you turn 70½. So, if you hit the “magic age” last year, the April 1 deadline for you to take your initial RMD just passed. Remember, however, that this initial RMD is for the 2016 tax year, even though you still don’t have to withdraw it until April 1, 2017.

The IRS will charge you a penalty equal to 50% of the shortfall (the difference between the RMD amount you should have taken for the 2016 tax year and the amount you withdrew through April 1, 2017), if you failed to withdraw the full RMD amount by April 1, 2017.

You can ignore the April 1 RMD deadline if you already took one or more traditional IRA withdrawals last year that equaled or exceeded the amount of your RMD for the 2016 tax year. Just remember to take your second RMD, for the 2017 tax year, by December 31, 2017. The calendar year-end deadline applies for all future years, too.

Calculating RMDs

For the 2016 calendar year, the RMD amount that you must withdraw by April 1, 2017, if you turned 70½ in 2016 — or were required to withdraw by December 31, 2016, if you previously turned 70½ — equals the combined balance of all your traditional IRAs (including any SEP accounts and SIMPLE IRAs) as of December 31, 2015, divided by a life-expectancy factor based on your age as of December 31, 2016.

It is your choice if you want to withdraw that amount from any one of your traditional IRAs or from several IRAs. If your spouse also has one or more traditional IRAs set up in his or her own name, the RMD rules apply separately to those accounts. So, if your spouse turned 70½ last year, he or she may need to heed the April 1 deadline, too.

Important note: Since Roth IRAs established in your name are exempt from the RMD rules for as long as you live, you can continue to invest the full amount of your Roth IRA balances and continue to produce tax-free income throughout your lifetime.

Consider a Tax-Free Alternative

Individuals who have reached age 70½ can make annual cash donations to IRS-approved charities directly from their IRAs, instead of taking taxable RMDs. These so-called qualified charitable distributions (QCDs) come out of your traditional IRA free from federal income tax. (Other IRA distributions, including RMDs, are generally at least partially taxable.)

You can’t claim itemized deductions for QCDs like you can with cash donations to charities. The tax-free treatment of QCDs equates to a 100% deduction however, because you’ll never be taxed on those amounts.

As an added bonus, a QCD coming from a traditional IRA counts as a distribution for purposes of complying with the RMD rules. So, if you turned 70½ last year and haven’t yet taken your RMD for last year, you could have arranged for one or more QCDs before April 1, 2017, to meet all or part of your RMD obligation for the 2016 tax year. In other words, you can substitute one or more tax-free QCDs for the RMD that you would otherwise have to take by April 1, 2017, and pay taxes on.

Following QCD Guidelines

A QCD must meet the following requirements.

• It can’t occur before the IRA owner turns 70½.
• It must meet the requirements for a 100% deductible donation under the itemized charitable deduction rules. If you receive any benefits that would be subtracted from a donation under the normal charitable deduction rules — such as tickets to a sporting or social event — the IRA distribution isn’t considered a QCD, and you’ll owe taxes on it.

It’s important to note that there’s a $100,000 limit on total QCDs for the year. But if you and your spouse both own IRAs, you’re each entitled to a separate $100,000 annual QCD limit.

Beyond Your IRAs

Different rules and conditions may apply to RMDs from inherited accounts and your qualified employer-sponsored retirement plans, including:

• 401(k) plans,
• 403(b) plans,
• 457(b) plans,
• Profit sharing plans, and
• Other defined contribution plans.

RMDs must begin once the account holder is age 70 ½ if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan.

Need Help?

Be sure to contact your tax advisor to ensure you’re in compliance with the rules regarding RMDs in Maine because they can be quite complex. Individuals who are 70½ or older should be aware of the RMD rules and the deadlines that apply in the year they turn 70½ and beyond.