Go­ing Through With­drawal

The Washington Post Sunday - - Sunday Briefing -

A fter years of putting money away for re­tire­ment, you’d think that tap­ping those sav­ings would be the easy part. Think again.

It turns out that the rules cov­er­ing with­drawals are com­plex, and your de­ci­sions about tak­ing money out can have se­ri­ous con­se­quences. When and how much to with­draw from your re­tire­ment ac­counts are among the most fre­quent ques­tions I’ve been asked since I started writ­ing this col­umn.

When I started look­ing into the is­sue, I knew the ba­sics. In gen­eral, at age 59 1⁄2, you may take dis­tri­bu­tions from your IRA and 401(k) with­out the 10 per­cent penalty you would in­cur at an ear­lier age. If you take the money, you’ll be li­able for taxes on the amounts with­drawn. By age 70 1⁄2, you no longer have a choice when it comes to tra­di­tional IRAs and, in most cases, 401(k) plans. You have to take some of the money.

But be­yond that, I wasn’t sure. What’s the smartest way to time those with­drawals? And how much are you re­quired to take out?

I talked to two ex­perts, Olivia S. Mitchell, ex­ec­u­tive di­rec­tor of the Whar­ton School’s Pen­sion Re­search Coun­cil, and Bill Flem­ing, man­ag­ing di­rec­tor in the private com­pany ser­vices group of Price­wa­ter­house­Coop­ers. What I learned is how much there is to learn. I ex­pect I’ll be writ­ing more about this sub­ject as we go along.

Let’s start with when you should start tak­ing money out. Mitchell and Flem­ing said the tim­ing hinges, among other things, on how with­drawals af­fect your tax li­a­bil­ity. De­pend­ing on your in­come, you might be bet­ter off start­ing be­fore you turn 70 1⁄ be­cause if you wait, your

2 manda­tory dis­tri­bu­tion might be larger — po­ten­tially lead­ing to a big­ger tax bill.

If you de­cide to wait un­til you reach 70 1⁄2, the law says, you have to make your first with­drawal by April 1 of the year af­ter that magic half-birth­day. How­ever, your sec­ond an­nual with­drawal will have to be made by the end of that same year. That could re­quire you to take two with­drawals in one year, in­creas­ing your tax­able in­come and pos­si­bly putting you in a higher tax bracket.

“It gets very dev­il­ishly com­pli­cated be­cause of the tax side of the story,” said Mitchell.

An­other fre­quent ques­tion is whether you can take your with­drawal from a sin­gle ac­count or need to spread it among all of them.

Sup­pose you have a tra­di­tional IRA (where your tax-de­ferred in­come has been grow­ing), a Roth IRA (where money on which you have al­ready been taxed has been grow­ing) and a 401(k) plan with your for­mer em­ployer.

First of all, don’t worry about the Roth IRA. You don’t have to take any min­i­mum with­drawals from there, even af­ter age 70 1⁄2. The gov­ern­ment has al­ready col­lected taxes on con­tri­bu­tions into that ac­count, so money in­vested in your Roth can stay there, earn­ing more with­out any fu­ture tax con­se­quences.

What the IRS cares about is money on which taxes have been de­ferred. That’s why the gov­ern­ment re­quires you to take dis­tri­bu­tions from both your tra­di­tional IRA and your 401(k) by a cer­tain age. To sim­plify with­drawals, Flem­ing said he tells peo­ple who are older than 70 to fold their 401(k) ac­counts into tra­di­tional IRAs.

There is one ex­cep­tion re­gard­ing 401(k) with­drawals: You don’t have to take a dis­tri­bu­tion at age 70 1⁄ if you’re

2 still work­ing for the com­pany that spon­sors the plan.

“I’ve been work­ing in this area for 20 years, and I just found that out,” said Mitchell, tes­ti­fy­ing to the com­plex­ity of what economists of­ten re­fer to as the “de­cu­mu­la­tion” phase of re­tire­ment plan­ning.

As for how much you are re­quired to with­draw, the an­swer de­pends on life-ex­pectancy ta­bles used by the IRS. Find­ing them, how­ever, re­quires wad­ing through some long IRS publi­ca­tions. The best place to go is a doc­u­ment called Pub­li­ca­tion 590, which has the ta­bles cleanly laid out at the end. It can be found at http://www.irs.gov/pub/ irs-pdf/p590.pdf.

Of the three ta­bles at the end of Pub­li­ca­tion 590, the one that mat­ters to most IRA hold­ers is Ta­ble III, or Uni­form Life. (There is also Ta­ble II for folks with much younger spouses and Ta­ble I for IRA ben­e­fi­cia­ries.)

Ac­cord­ing to the Uni­form Life ta­ble, av­er­age life ex­pectancy at age 70, also known as the “dis­tri­bu­tion pe­riod,” is 27.4 years. For ex­am­ple, if I had turned 70 1⁄ at the end of last year, I would need

2 to di­vide the to­tal amount left in my tax-de­ferred re­tire­ment plan by 27.4 to know how much to take out this year.

Al­though you may take out more than your re­quired manda­tory min­i­mum with­drawal, the cal­cu­la­tions are de­signed to make the money last a life­time, says Marty Pip­pins, the IRS’s man­ager of em­ployee plans, tech­ni­cal guid­ance and qual­ity as­sur­ance, who helped me find the ta­bles.

And you need to keep check­ing those ta­bles. That I have a life ex­pectancy of 27.4 years at age 70 doesn’t mean I will con­tinue to di­vide my bal­ance by that num­ber ev­ery year there­after. The longer you live, the longer you can ex­pect to live. At age 75, my life ex­pectancy wouldn’t be 22.4 years (27.4 mi­nus 5) but 22.9 years, and my re­quired with­drawal would be what was left in my ac­counts di­vided by that num­ber.

Could it be more com­pli­cated? Maybe. We haven’t even touched on is­sues such as what you should do with the dis­tri­bu­tions you take, as­sum­ing you don’t need them to live on.

“It’s a huge mess,” said Flem­ing. “Whole books have been writ­ten about IRAs and min­i­mum dis­tri­bu­tions. Prob­a­bly one of the most com­pli­cated cal­cu­la­tions, and con­tin­u­ing cal­cu­la­tions, is im­posed on an ag­ing group who is most likely to have a prob­lem at some point.” Any ques­tions about re­tire­ment that you’d like to see ex­plored in the col­umn? Please e-mail me at hamil­tonm@wash­post.com.

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