REQUIRED MINIMUM DISTRIBUTIONS: A BLESSING OR A CURSE?

I am at an age where I think about retirement. When can I retire? Will I ever feel I’ve saved enough money? How much money is enough? Is there such a thing as enough money? As Woody Allen said, “Money is better than poverty, if only for financial reasons.” Source: NLG


My husband and I are DIPPs (double income, plural pensions). We are fortunate to work for employers that offer retirement plans. And we have other assets set aside in separate accounts. If we plan well, we can decide what accounts to access in retirement. But what if we plan really well, and find that some of that money just isn’t necessary. Wouldn’t that be a good problem to have? Maybe yes or maybe no, depending on your perspective.


The Internal Revenue Service allows people to accumulate money on a pre-tax basis for retirement. But at a certain point, they want people to begin accessing that money and paying taxes. The deadline to begin taking those distributions is April 1st of the year following the year you turn age 70 ½. The amount that has to be taken is minimal, but you do have to take it, even if you don’t need the money.


I would consider it a blessing that I had accumulated more money in retirement than I needed. But there are those who would consider it a curse. My father-in-law falls into that category. When he was approaching 70 ½ he began to complain about having to take required minimum distributions from his IRA. He was living comfortably and didn’t need the extra income. He began playing the “what if” game trying to come up with scenarios that would allow him to avoid taking the distributions. I told him he had no option but to take a minimum distribution each year. And I reminded him how lucky he was that he didn’t need to find work to supplement his retirement income. So take the money, pay the taxes, and then take a trip, put the money into a savings account or CD, buy life insurance, or give the money to the grandchildren for college or give it to me, his favorite (and only) daughter-in-law. I’m still waiting for him to take my advice on the daughter-in-law thing.


How much would you have to take as a minimum distribution? You have to take your prior year-end account balance and divide it by a life expectancy factor provided by the IRS. So if you were 70 ½, the divisor would be 27.4. If you had $500,000 in a qualified account, the minimum distribution would be $18,248.17. You have to pay tax on that amount at your personal income tax rate. If it is 33%, that would be $6,021.89, leaving you with $12,226.28. And remember, the balance of your money remains in the account, continuing to earn interest.


So plan well for retirement and don’t worry about taking a minimum distribution each year. Take a vacation. Play more golf. Spend quality time with your family. And be happy that you have the freedom to decide what you want to do every day. What a blessing.

Source: IRS – Retirement Topics – Required Minimum Distributions (RMDs), 2015

The companies of National Life Group® and their representatives do not offer tax or legal advice. For advice concerning your own situation, please consult with your appropriate professional advisor.


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