Retirement Planning Tip: Required Minimum Distributions

Required Minimum DistributionsIf you have tax-deferred retirement savings (such as certain 457(b) plans offered by NYS Deferred Comp), you will eventually have to start withdrawing that money. After you turn 70½, you’ll be subject to a federal law requiring that you withdraw a certain amount from your account each year. If you don’t make the required withdrawals, called Required Minimum Distributions (RMDs), you could face significant penalties.

RMDs are never eligible for rollover into other retirement accounts. You must take out the money and pay the taxes.

Calculating the Distribution

The RMD amount must be calculated annually. It’s based on the account’s balance at the end of the previous calendar year and the life expectancy of you and your beneficiary. Check out AARP’s Required Minimum Distribution Calculator for an easy way to determine your required distributions. Many retirement plan administrators, including the New York State Deferred Compensation Plan, will inform you of your RMD amount, but it’s your responsibility to take the required distribution.

Potential Penalty

If you don’t take the required distribution, or if you withdraw less than the required amount, you may have to pay a 50 percent tax on the amount that was not distributed. (You must report the undistributed amount on your federal tax return and file IRS Form 5329.)

The IRS may waive the penalty if you can show that your failure was due to a “reasonable error” or that you have taken steps to correct the situation. You can find information about requesting a waiver on page 8 of the Form 5329 instructions.

What Accounts Require Minimum Distributions?

Most retirement accounts you’re familiar with require these annual withdrawals:

  • 457(b) plans
  • IRAs (traditional, SEP and SIMPLE)
  • 401(k) plans
  • 403(b) plans
  • Profit-sharing plans
  • Money purchase plans

Since contributions to Roth IRAs have already been taxed, the IRS does not require distributions from Roth IRAs at any age.

As with most things investment-related, a lot depends on your particular circumstances. If you have questions, contact your financial advisor or your plan administrator.

6 thoughts on “Retirement Planning Tip: Required Minimum Distributions

  1. Elsie McCabe

    I am currently still working; does this mandatory withdrawal pertain to people over 70 who are still employed?

    Reply
    1. NYSLRS

      That depends on your plan. According to the IRS, a plan can let you retire before you take your first RMD. For example, many NYSLRS members also participate in the New York State Deferred Compensation Plan, which lets you wait until you retire. However, other plans do hold to the 70½ requirement. You’ll need to contact your plan administrator to find out how your particular plan is structured.

      Reply
    2. Dawn

      yes. I worked with a polish lady, in her 80’s that was working a full time job, (inspection dept.) and she was mad because she HAD to take out a certain amt ea. year. she worked because she was bored at home (her husband had retired and passed away)

      Reply
  2. Steven Gilbert

    Important to note: If you put $’s into the Roth version of 457b offered by NYSDCP, and retire before 70 1/2, you can rollover the contents of your 457b Roth into a personal Roth IRA, thus avoiding the need to take annual RMD’s

    Reply
    1. Cinthia Vulcano

      Would this be true of a 403B as well?

      I have TIAA Cref for a small portion and then just TIAA after the rules changed.

      So, in other words at age 70 1/2, there is a minimum required disbursement. How much (a percentage I would think)?

      Can I take the minimum required distribution and role it over to a Roth? Would I have to pay tax on it (the money I rolled over from the 403B to the Roth)? What if I got a trust, do the rules change because the investment is no longer in your name but in the trusts name.

      Reply
      1. NYSLRS Post author

        We’re sorry, but NYSLRS is unable to answer specific questions about required distributions. You may wish to contact the Internal Revenue Service (http://www.irs.gov) or speak with a financial adviser.

        Reply

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