The IRS keeps track of birthdays. It takes particular note when you turn 70, because six months later you may have to do something you would rather not do:
Begin withdrawing monies from your IRA, 401(k), 403(b), or individual retirement account, locations where your savings have earned interest and have been safe from federal and state taxmen and taxwomen. The withdrawals are called RMDs, or "required minimum distributions." They must begin by April 1 of the year following when you turn 70-and-a-half.
The RMD amount will be based on the December 31 value of the account in the year prior to the year you turn 70-and-a-half. In all subsequent years the RMD must be distributed by December 31. But qualified employer retirement plans offer additional flexibility, allowing you to delay taking RMDs as long as you continue to work.
"Does that mean I don't have to start taking out monies from my retirement accounts?" asked a 71-year-old senior helpline caller. He has spent the last 20 years working for a national banking system that maintains a contributory retirement plan. Assuming it is "qualified," he would not have to begin withdrawals until April 1 of the year following his retirement. "When do you plan to retire?" I asked. "I don't," he responded.
"I've been rat-holing money for 50 years," he said. "I worked for a processing company for 30 years and now 20 with this bank. I've never made big money, but I've lived within my means and taken full advantage of the tax-shelters built into both retirement plans." He called because of conflicting reports. "It's confusing," he said.
Here is the current status: Required minimum distributions from IRAs and defined contribution plans were suspended in 2009, allowing those typically required to take distributions to further grow their account values without penalties. But RMDs returned in 2010. I advised him to contact human resources and verify that it is a "qualified plan," exempt from the RMD withdrawal. The failure to withdraw a full RMD on time in any year exposes a person to an IRS penalty of 50% of the required amount that wasn't distributed.
Eventually the caller will have to begin withdrawing monies from one or both of his retirement plans. If he doesn't need the RMDs for living expenses, he should consider re-investing the after-tax proceeds into tax-efficient accounts such as a mutual fund or municipal bond fund; or invest the proceeds in a 529 college savings plan for his grandchildren.
Fifty years on the job and "rat-holing tax-free money" is paying off.
(Pro bono legal information and advice is available to person 55 and older through the USD Senior Legal Helpline, 1-800-747-1895; email@example.com. Opinions are solely those of the author and not the University of South Dakota).