Save on Taxes When You Save for Retirement
Withdrawal Time
© by Lita Epstein
You are usually faced with withdrawal options for employer-sponsored retirement plans at two different times - one when you leave a job (either by choice or not) and the other when you do actually retire.
You now have greater freedom of choice since the 2001 tax act. You can make a tax-free rollover of distributions from one type of retirement plan to another. This is important for a person who changes jobs and wants to move retirement assets from one employer's plan to another. Some plans have been limited to rollovers to or from the same type of plan. Before 2002 there were limitations about mixing for-profit and non-profit or government plans. Now you can rollover qualified employer plans, 403(b) annuities, governmental 457 plans and IRAs, even if they are a different type of plan. For example, workers switching from a government agency to a public school might roll over their section 457 plan assets to a 403(b) annuity. Although plans may accept rollovers, they are not required to do so. Workers moving from a non-profit to a for-profit company, can rollover 403(b) funds into 401(k).
A surviving spouse may roll over the decedent's distributions from an employer plan into the survivor's employer plan. Before 2002, a surviving spouse could rollover such distributions only into an IRA.
IRA assets may be rolled over to employer plans even if they did not come from another employer plan. Employees who roll over employer plan distributions into an IRA no longer have to keep that IRA separate - a "conduit IRA" - in order to do a future rollover to another employer's plan. However, taxpayers born before Jan. 2, 1936, who want to keep special capital gains and ten-year averaging benefits will need a conduit IRA to move assets from one employer plan to another.
You don't want to rollover funds that have already been taxed (such as a Roth IRA) into other types of retirement accounts that will be taxed or you could lose your tax-free benefits.
When you actually do retire, you must start withdrawing funds by 70½ or risk facing a 50% excise tax. The only type of retirement fund that is not taxed for failing to withdraw is the Roth IRA. There are no required withdrawals for your Roth. Otherwise you must withdraw at least the amount shown in these life expectancy tables from the IRS:
Age Life Expectancy Divisor
70 26.2
71 25.3
72 24.4
73 23.5
74 22.7
75 21.8
76 20.9
77 20.1
78 19.2
79 18.4
80 17.6
81 16.8
82 16.0
83 15.3
84 14.5
85 13.8
86 13.1
87 12.4
88 11.8
89 11.1
90 10.5
91 9.9
92 9.4
93 8.8
94 7.8
95 7.3
96 6.9
97 6.5
98 6.1
Here's how you figure your required minimum distribution (RMD) using this table:
Total Assets in Retirement Account
---------------------------------- = RMD
Life Expectancy Divisor
Let's practice using the table. We'll assume you are 75 and that your total remaining assets are $500,000. Here's what the calculation would look like:
$500,000
-------- = $22,936
21.8
So, in this case, you must withdraw $22,936 to avoid an excise tax.
Managing your distributions at retirement requires much complex decision-making. I carry this in much greater detail in my book Streetwise Retirement Planning.
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Copyright 2003, by Lita Epstein.
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