Plan ahead: Turning 70 can bring a booming tax headache

The first wave of Boomers turned 70-and-a-half this summer. What, you forgot the cake?

Well, what you don't want to forget is the extra tax planning now required if you have money saved up for retirement in 401(k) plans or Individual Retirement Accounts.

Age 70-and-a-half is a magic number for retirement savers. It's a number that should trigger review of how much they need to take a specific amount of money out of their retirement savings accounts (not Roth IRA accounts) and the taxes owed start paying taxes on those withdrawals —  known as "required minimum distributions."

In some cases, retirees have overlooked that deadline and created tax headaches. Ignoring a required minimum distribution deadline can trigger a 50% penalty on the amount that was required to be withdrawn.

It's estimated that about 1.4 million boomers born in the first half of 1946 will hit 70-and-a-half this year. If they're going to withdraw money this year, they'll need to take action by Dec. 31.

They will be in famous company. Celebrities hitting the magic number this year include GOP presidential candidate Donald J. Trump, actress Diane Keaton, pop star Cher, and singer-songwriter Dolly Parton, among others.

Remember, you're not required to spend that money — only to withdraw a specific amount from your 401(k) or traditional IRA. It's alright  to set that money aside in non-retirement investment or savings accounts.

The rules are extremely strange. Here's what Boomers need to know now that they've built up that retirement savings:

•Required minimum distributions don't just arrive magically in the mail.

•It's possible to take your first required minimum distribution by Dec. 31 in the year you turn age 70-and-a-half — or you have a one-time chance at delaying that first distribution a few more months.

•If you delay taking that first required distribution, you must take your first withdrawal by April 1 of the next year after you turn 70-and-a-half. After the first one, the required minimum distributions must be made by Dec. 31 going forward.

•By dragging things out until April 1, you're bunching up two distributions in one tax year, potentially pushing you into a higher tax bracket.

Maura Cassidy, vice president for retirement products for Fidelity Investments, said in general most retired people who are no longer working would want to should take their first distribution by Dec. 31 and not delay until April 1. Typically, you do not want to take two required distributions in one year because it could put you in a higher tax bracket and drive up your tax bill.

For retirees, it's particularly important to consider that you'd also risk additional phase outs of itemized deductions, increased taxation of Social Security benefits and higher Medicare premiums in the next year, said George W. Smith IV, an accountant based in Southfield, Mich.

Consider this example: If you had $100,000 in savings in traditional IRAs, as of Dec. 31, 2015, the required minimum distribution for 2016 would be nearly $3,650. It's possible, in this example, that you could be looking at being required to withdraw $3,825 for 2017.

So, again in this example, you'd be adding $7,475 in taxable income if you withdrew both required amounts in 2017.

Financial institutions typically alert you to the required distributions but they don't force you to withdraw money from an IRA because you could have money spread at a variety of other firms.

Several online retirement calculators address at major brokerage or financial planning websites required minimum distributions online. Another option: The Internal Revenue Service website at www.irs.gov also has required minimum distribution worksheets.

Your actual required distribution is going to vary each year based on your age, how much money you have in retirement savings and how well your investments perform. It also is more complicated if you made both tax deductible and non-deductible contributions to the IRA, you're married and your spouse is more than 10 years younger than you or you have an inherited IRA.

It is possible to work with your financial institution to set up automatic withdrawals in one lump sum each year or even each month and have taxes withheld from those withdrawals.

"The benefit of having it set up automatically is you don't forget to take it," said Cassidy, of Fidelity Investments.