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Retirement Account Distributions After Age 70½

 

Key Points

» Required Minimum Distributions During Your Lifetime
» Additional Considerations for Employer-Sponsored Plans
» Employer-Sponsored Retirement Plan Distribution Alternatives
» Lump-Sum Distributions
» Periodic Distributions
» Uniform Lifetime Table for Required Minimum Distributions
» Other Considerations
» Conclusion
» Points to remember

If you have assets in a qualified retirement plan, such as a
company-sponsored 401(k) plan or a traditional Individual
Retirement Account (IRA), you’ll want to be aware of several
rules that may apply to you when you take a distribution.

Required Minimum Distributions During Your Lifetime

 

Many people begin withdrawing funds from qualified retirement
accounts soon after they retire in order to provide annual
retirement income. These withdrawals are discretionary in terms of
timing and amount until the account holder reaches age 70½.
After that, failure to withdraw the required minimum amount
annually may result in substantial tax penalties. Thus, it may be
prudent to familiarize yourself with the minimum distribution
requirements.

For traditional IRAs, individuals must generally begin taking
required minimum distributions no later than April 1 following the
year in which they turn 70½. The same generally holds true
for 401(k)s and other qualified retirement plans. (Note that some
plans may require plan participants to remove retirement assets at
an earlier age.) However, required minimum distributions from a
401(k) can be delayed until retirement if the plan participant
continues to be employed by the plan sponsor beyond age 70½
and does not own more than 5% of the company.

In 2002, the IRS issued final regulations that greatly simplify the
calculation of required minimum distributions. Now, minimum
distributions are determined using one standard table based on the
IRA owner’s/plan participant’s age and his or her account
balance. Thus, required minimum distributions generally are no
longer tied to a named beneficiary. There is one exception,
however. IRA owners/plan participants who have a spousal
beneficiary who is more than 10 years younger can base required
minimum distributions on the joint life expectancy of the IRA
owner/plan participant and spousal beneficiary.

These minimum required distribution rules do not apply to Roth
IRAs. Thus, during your lifetime, you are not required to receive
distributions from your Roth IRA.

Additional Considerations for Employer-Sponsored Plans

 

The table below is general in nature and not a complete discussion
of the options, advantages, and disadvantages of various
distribution options. For example, there are different types of
annuities, each entailing unique features, risks, and expenses. Be
sure to talk to a tax or financial advisor about your particular
situation and the options that may be best for you.

Employer-Sponsored
Retirement Plan Distribution Alternatives1
Method Advantages Disadvantages
Annuity A regular periodic payment,
usually of a set amount, over the lifetime of the designated
recipient. (Not available with some plans.)
Assurance of lifetime income;
option of spreading over joint life expectancy of you and your
spouse.2
Not generally indexed for
inflation.
Periodic Payments Installment payments over a
specific period, often 5 – 15 years.
Relatively large payments over
a limited time.
Taxes may be due at highest
rate.
Lump Sum Full payment of the monies in
one taxable year.
Direct control of assets; may
be eligible for 10-year forward averaging.
Current taxation at
potentially highest rate.
IRA Rollover A transfer of funds to a traditional IRA (or Roth
IRA if attributable to Roth 401(k) contributions).
Direct control of assets; continued tax deferral
on assets.
Additional rules and limitations.

In addition to required minimum distributions, removing money from
an employer-sponsored retirement plan involves some other issues
that need to be explored. Often, this may require the assistance of
a tax or financial professional, who can evaluate the options
available to you and analyze the tax consequences of various
distribution options.

Lump-Sum Distributions.

 

Retirees usually have the option of removing their retirement plan
assets in one lump sum. Certain lump sums qualify for preferential
tax treatment. To qualify, the payment of funds must meet
requirements defined by the IRS:

  • The entire amount of the employee’s
    balance in employer-sponsored retirement plans must be paid in a
    single tax year.
  • The amount must be paid after you turn 59
    ½ or separate from service.
  • You must have participated in the plan for
    five tax years.

A lump-sum distribution may qualify for preferential tax treatment
if you were born before January 2, 1936. For instance, if you were
born before January 2, 1936, you may qualify for 10-year forward
income averaging on your lump-sum distribution, based on 1986 tax
rates. With this option, the tax is calculated assuming the account
balance is paid out in equal amounts over 10 years and taxed at the
single taxpayer’s rate. In addition, you may qualify for
special 20% capital gains treatment on the pre-1974 portion of your
lump sum.

If you qualify for forward income averaging, you may want to figure
your tax liability with and without averaging to see which method
will save you more. Keep in mind that the amounts received as
distributions are generally taxed as ordinary income.

To the extent 10-year forward income averaging is available, the
IRS also will give you a break (minimum distribution allowance) if
your lump sum is less than $70,000. In such cases, taxes will only
be due on a portion of the lump-sum distribution.

If you roll over all or part of an account into an IRA, you will
not be able to elect forward income averaging on the distribution.
Also, the rollover will not count as a distribution in meeting
required minimum distribution amounts.

Periodic Distributions.

 

If you choose to receive periodic payments that will extend past
the year your turn age 70 ½, the amount must be at least as
much as your required minimum distribution, to avoid
penalties.

Uniform Lifetime Table
for Required Minimum Distributions
Age 70 75 80 85 90 95 100 105
27.4 22.9 18.7 14.8 11.4 8.6 6.3 4.5

 

This table shows required minimum distribution periods for
tax-deferred accounts for unmarried owners, married owners whose
spouses are not more than 10 years younger than the account owner,
and married owners whose spouses are not the sole beneficiaries of
their accounts.

Source: IRS Publication
590.

Other Considerations.

 

If your plan’s beneficiary is not your spouse, keep in mind
that the IRS will limit the recognized age gap between you and a
younger nonspousal beneficiary to 10 years for the purposes of
calculating required minimum distributions during your
lifetime.

Conclusion

 

There are several considerations to make regarding your retirement
plan distributions, and the changing laws and numerous exceptions
do not make the decision any easier. It is important to consult
competent financial advisors to determine which option is best for
your personal situation.

Points to Remember

 

  1. Distributions from a 401(k) can be delayed until retirement if
    a plan participant is still employed by the plan sponsor beyond age
    70 ½ and if the plan participant does not own more than 5%
    of the company.
  2. After age 70½, failure to withdraw the required minimum
    amount annually may result in substantial tax penalties.
  3. A lump-sum distribution may qualify for 10-year forward income
    averaging.
  4. The IRS will give you a break (minimum distribution allowance)
    if your lump sum qualifies for 10-year forward averaging and is
    less than $70,000.
  5. You may be able to accelerate or minimize the disbursement of
    your retirement assets by how you choose to calculate periodic
    payment time periods.

1Speak to a tax or financial advisor about your
alternatives before making a decision.

2Annuity guarantees are backed by the claims-paying
ability of the issuing company.

© 2010 Standard & Poor’s Financial Communications. All
rights reserved.