1 to 2 Years Before RetirementOnce you have reached retirement, you'll need to understand how to consolidate your retirement accounts and set up a distribution schedule—one that will meet your retirement needs and fulfill IRS requirements. It is important that you consult your tax advisor for more information on the latest IRS tax regulations and pension requirements.
Income Distribution—What You Should Know
Social SecurityYou can start collecting benefits the first full month you turn age 62. But taking your benefits early could reduce your benefits by as much as 30% over your lifetime.
Keep in mind that the age you can start taking full retirement benefits has been raised. If you were born before 1938, you'd receive full benefits at age 65. If you were born in 1938 or later, you'd have to wait as long as age 67. See the outline below for details.
|Year of Birth
||Age You Can Collect Full Social Security Retirement Age Benefits:|
|1937 or earlier
||65 and 2 months|
||65 and 4 months|
||65 and 6 months|
||65 and 8 months|
||65 and 10 months|
||66 and 2 months|
||66 and 4 months|
||66 and 6 months|
||66 and 8 months|
||66 and 10 months|
|1960 and later
*Persons born on January 1 of any year should refer to the
previous year. Source: Social Security Administration
Personal investments and retirement accountsMost experts will tell you the best plan is to take income from a blend of sources instead of liquidating one investment first. So, you might take a portion from your retirement accounts and then take interest on your taxable investments. But you should consult your tax advisor for help based on your own personal situation.
If you have an annuity, you'll probably want to wait to withdraw income until you are already retired and at least age 59½ (to avoid tax penalties). When you withdraw income from an annuity, or "annuitize," you are basically trading the value of your contract (principal and earnings, minus withdrawals) for the insurance company's guarantee to make payments to you for a certain period or for your lifetime. This guarantee is based on the claims paying ability of the insurance company.
- If you have an employer pension plan or retirement plan, you have several options:
- If your balance is over $5,000, you have the option to leave your money in the plan. If your balance is less than $5,000, your employer may require you to withdraw your money. Take a lump-sum distribution—If you do this, you'll be subject to mandatory 20% federal income tax withholding (and a 10% penalty if you're under age 59½.)
- Roll it directly into an IRA or another qualified plan. Just ask your employer to send a check directly to the financial institution where you are setting up an IRA account or to your new plan.
Tax RulesWhen you invest in retirement accounts, be aware of the following tax rules:
If you are 59½ you can start withdrawing money from retirement accounts, without tax penalties, although you will be subject to ordinary income tax.
If you are 70½ you must start taking income from you retirement accounts, or face tax penalties and these withdrawals are subject to ordinary income tax.
Exceptions: Roth IRAs
You can keep your money in a Roth IRA for as long as you want.
IRA Distributions Early Withdrawals
Traditional IRA: Allows you to grow your assets tax-deferred—you won't pay taxes on earnings until you withdraw the assets. If you withdraw money from an IRA before you reach 59½ you may be subject to a 10% early withdrawal penalty. However, you may withdraw money from your Traditional IRA without penalty as a "qualified withdrawal" under the following circumstances:
- You become disabled.
- Are a first-time homebuyer.
- Incur certain non-reimbursed medical expenses.
- Incur qualified higher-education expenses.
- Take substantially equal periodic payments for life.
- If you die, the 10% penalty will not apply to the distribution to your beneficiary.
Roth IRA: Assets grow federally tax-free provided certain requirements are met.You can take qualified withdrawals from a Roth IRA after 5 years under the following circumstances:
- If you become disabled.
- After you reach age 59½.
- For a qualified first-time home purchase. Withdrawal is subject to a $10,000 lifetime limit.
- If you die, your family or estate can make a qualified withdrawal from your Roth IRA.
See your tax consultant for a complete list of qualified withdrawal requirements.
- Once you reach 70½, you are required to take a minimum withdrawal from your Traditional IRA each year.
- The withdrawal for the year you reach age 70½ must be made no later than April 1 of the following year.
- If you fail to take distributions at this time, you will be taxed, at a whopping 50% rate each year on the amount that should have been withdrawn.
Calculating How Much to Withdraw
It's easy to calculate your minimum required withdrawal for a given tax year. Just divide the value of your account at the end of the previous year by the number of years in your life expectancy. Let's say that your Traditional IRA account was worth $60,000 on December 31, 2011. Your life expectancy was 10 years. You should have withdrawn $6,000 from your Traditional IRA account in the year 2011. (The $60,000 IRA divided by your 10-year life expectancy equals $6,000.) Your minimum withdrawal will change every year, as your account balance and your life expectancy change. Remember, you aren't required to make withdrawals from your Roth IRA.
What's your life expectancy?
The IRS provides two methods you can use to calculate this. First, use an IRS chart that recalculates your life expectancy every year. The second method calculates your life expectancy at 70½ and then subtracts one year from that life expectancy in each subsequent year.
Life expectancy calculations can be complicated. Before you make any decisions about how you will calculate your life expectancy, get expert tax advice. Find someone who can explain clearly how the different calculations work, and how they will affect your withdrawals. Once you choose a life expectancy calculation, you can't change your mind later.
IRS and Income Distribution Penalties
When considering taking withdrawals from your retirement accounts, you should be aware of tax penalties the Internal Revenue Service may impose for withdrawing retirement assets too early or too late.
If you are under age 59½ when you withdraw money from your retirement plan, you may have to pay a 10% early withdrawal penalty. For withdrawals from an employer's plan, the penalty may not apply if you:
- Leave your employer in the year you turn age 55 or later.
- Are disabled.
- Are withdrawing money to meet certain un-reimbursed medical expenses.
- Are receiving the money in the form of "substantially equal periodic payments" based on your life expectancy.
- If you die, the 10% penalty will not apply to the death benefit paid to your beneficiary.
Besides the tax consequences, retiring early may reduce your employee medical coverage, pension and Social Security payments, and other key benefits. Contact your benefits administrator for more information about the impact of retiring early.
If you are age 70 or over:
- Once you retire, the IRS generally requires that you begin withdrawing money from all of your tax-advantaged retirement accounts by April 1 following the year in which you reach age 70½.**
- The amount you are required to withdraw is called the required minimum distribution, or RMD.
- Your RMD amount varies each year based on the total value of your retirement accounts (including pensions).
- Rollover IRAs, systematic withdrawals from your retirement plan, and income annuities—can be established as RMDs to avoid a withdrawal short-fall.‡
- Consolidating your retirement savings can simplify the RMD process.
- Check with a tax expert for current IRS regulations on RMDs.
- The taxable portion of a distribution from your retirement plan will be taxed as ordinary income in the year withdrawn.
- If you are under age 59½ at the time of the distribution, a 10% early withdrawal penalty may apply.
- If a distribution is an eligible roll over distribution, but is not directly rolled over to a new employer's eligible retirement plan, an IRA or an annuity, a 20% mandatory withholding of federal income tax applies.
**Participants who are less than 5% owners of their employers and who are actively employed may be able to defer their RMDs until April 1 following the calendar year in which they retire. For some 403(b) contributions made prior to 1987, RMDs do not have to begin until age 75.
‡ If you set up your payment schedule to satisfy the IRS rules for required minimum distributions (RMDs) or if you are taking "substantially equal periodic payments" to avoid the 10% early withdrawal penalty, any changes to your payment schedule may have adverse tax consequences..
Always consult a tax advisor before making any changes to your payment schedule or have questions regarding federal and state tax consequences of any distribution.
For Internal Revenue Service Information
To find out how the Internal Revenue Service (IRS) regulations affect your ability to save through a Traditional or Roth IRA. Read IRS Publication 590: Individual Retirement Arrangements. You can order the publication by calling
800-829-3676 or you can review it online at the IRS Web site at http://www.irs.gov/.
"Catch-Up" ContributionsMany Americans have not saved enough money for retirement. That's why the government allows people age 50 or older (50+) to make "catch up" contributions1 to their retirement saving accounts. If you are age 50+ and your plan includes a "catch-up" provision:
- You may be able to take advantage of the "catch-up" provision by contributing an additional $5,500 in 2012 ($2,500 for SIMPLE plans).
- If you participate in a 403(b) plan, you may be able to take advantage of both the age 50+ "catch-up" provision and the 403(b) lifetime catch-up provision, if you qualify. Consult your plan administrator for details.
- If you participate in a 457(b) plan, in each of the three years prior to your normal retirement age, you may be able to take advantage of either the age 50+ "catch-up" provision or an Enhanced Contribution Limit2. Consult your plan administrator for details.
Age 50+ Catch-up Contribution Limits
||401(k) and 403(b) plans
1 If the plan allows, a participant may make "catch-up" contributions when no additional elective deferrals may be made to the plan because of IRS or plan limitations and/or restrictions.
2 In the last three years normal retirement age, a participant in a 457(b) plan may contribute up to (1) double the deferral limits in effect at the time using the Enhanced Contribution Limit or (2) the age 50+ "catch-up" contribution limit, whichever is greater.