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Required Minimum Distribution

The IRS requires that owners of retirement plans such as traditional IRAs (individual retirement accounts) start taking minimum distributions or withdrawals from their plans by April 1st of the year that follows the time at which they turn 70.5 years of age. The required minimum distributions are then made each of the following years. The amount of the required minimum distribution is based on the fair market value of the plan at the end of the prior year, and the assumed distribution period which is based on life expectancy given the person's current age. Required minimum distributions apply to a broad range of retirement plans including: 401(k); 403(b); 457(b); Roth 401(k); SIMPLE IRA; SEPs, and; SARSEPs. Roth IRAs are excluded from this requirement while the owner is still alive.

Mark Warshawsky on the Retirement Income Market

Mark J. Warshawsky is Director of Retirement Research at Towers Watson.

Dr. Warshawsky served as assistant secretary for economic policy at the U.S. Treasury Department from 2004-2006 and he has held senior level economic research positions at the Federal Reserve Board, the Internal Revenue Service and TIAA-CREF.

Treasury Department Focuses on Longevity Risk with Retirement Income Guidance

The Treasury Department just released a proposed set of regulations that could have a meaningful impact on the retirement income market in the U.S.

The Treasury’s guidance package builds on feedback received in response to the request for comments issued by the Labor and Treasury Departments last fall.

The proposed regulations appear to be squarely focused on longevity risk.  The basis for this concern—particularly as it pertains to the middle class—is summarized in the following chart:

MetLife is Nudging the World of Defined Contribution toward Income Annuities

Jody Strakosch is the National Director for MetLife’s Retirement Products Group.  In this role, Jody has a broad perspective on developments in the institutional space.  In other words, Jody is intimately familiar with how in-plan accumulation and point of retirement annuities are evolving in the defined contribution arena. 

Annuity Taxes

The following list provides links to some of the key terms discussed in this chapter on annuity taxes:

The One Year Waiver of IRA Required Minimum Distributions

The IRS requires that individual retirement account (IRA) owners start taking minimum distributions from the account once they reach age 70 1/2.

Failure to take the mandated withdrawal triggers a 50% tax penalty on the amount that should have been taken out.

The financial crisis has prompted the government to approve a one year suspension of the required minimum distribution rule.

The article referenced at the bottom of this page provides very good information about IRA withdrawal rules and the temporary suspension.

Source: Associated Press

How do 401k plans work?

A 401k plan is established by an employer to assist their employees to save for retirement. Funds which are contributed into the plan by the employer are typically treated on a tax-deductible basis, although some plans offer the option to contribute on an after-tax basis. The funds grow on a tax-deferred basis and are taxed only upon withdrawal. Funds withdrawn prior to the age of 59 ½ are subject to early withdrawal fees and income taxes, while funds withdrawn after the age or 59 ½ are treated as ordinary income.

When do I have to start taking money out of my 401k?

Individuals are subject to the required minimum distribution (RMD) rule for funds within their 401k accounts, as set out by the IRS when they turn 70 ½. The RMD refers to a minimum annual amount which must be withdrawn from the individual’s qualified plans. The RMD amount is determined by calculating the individual’s life expectancy and dividing the prior year’s market value of qualified retirement plans by this figure. RMDs are calculated annually.

How does an IRA work?

Eligible individuals can make annual contributions into an IRA account, some of which may be treated on a pre-tax basis and therefore tax-deductible on the individual’s annual tax returns. The funds within the IRA grow on a tax deferred basis. Funds withdrawn from the IRA after the age of 59 ½ are fully taxable, including any and all taxable gains. At the age of 70 ½, funds within an IRA account are subject to the required minimum distribution requirements (RMDs) as set out by the IRS.

Income Limits for Roth IRA Conversions to be Eliminated

Income limits that have prevented many people from converting from a traditional IRA to a Roth IRA will be eliminated on January 1, 2010.

With a traditional IRA, contributions and growth of capital are tax free, but distributions are taxed as normal income.

Roth IRAs differ in that contributions are taxable while growth of capital and distributions are tax free.  In addition, unlike traditional IRAs, there are no required minimum distributions with Roth IRAs.  Last, with a Roth IRA your heirs do not owe income tax on withdrawals.

Retirement Planning Roadmap - Key Events

An outstanding layout of a retirement planning timeline from Emily Brandon at U.S. News and World Report.

Key dates and ages are discussed for all manner of retirement planning milestones:

Source: U.S. News and World Report

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