Your Retirement - Part 1 - FAQ

This series will cover some Frequently Asked Questions:

Your Retirement
Following are the basic rules governing taking minimum distributions from retirement plans and a few pointers for getting the most out of them.

Calculating Your Minimum Distribution
Congress created the rules described below to encourage saving for retirement. They imposed a penalty for early withdrawal and a penalty for failure to withdraw once the owner reaches retirement age. Until last year, there was also a penalty for excess withdrawals, in other words for those who saved more than they need for retirement, but that has been repealed.


These penalties are in the form of excise taxes. Withdrawals (with limited exceptions) before age 59 ½ are subject to a 10 percent excise tax. The plan participant must begin taking distributions by the April 1 occurring after he or she reaches age 70 ½ (known as the required beginning date), or pay a whopping 50 percent excise tax on the amount that should have been distributed but was not.

In general, the advantage of retirement plans is that the participant may save income before taxes during his or her working career and continue to have such savings grow without paying taxes until the funds are withdrawn. This permits the retirement savings to grow at a much faster rate than other savings and investments. The participant must pay taxes on any amounts withdrawn. As a result, it usually makes sense to postpone withdrawals for as long as possible.

The amount the participant must withdraw after reaching age 70 ½ is based on her own life expectancy and that of the person she names to receive the plan after her death, known as the designated beneficiary. At the required beginning date, your life expectancy will be either 15.3 years or 16.0 years, depending on whether you have reached your 71st birthday before the applicable April 1. If you have not designated a beneficiary, you will have to withdraw this portion of your plan at that time that is 1/16th (assuming you're 70 years old on your required beginning date). In other words, if your plan holds $160,000, you'll have to withdraw $10,000 or pay a penalty.

On the other hand, if, for instance, you have named your spouse as your designated beneficiary and you are both 70 years old, your joint life expectancy will be 20.6 years, meaning that you can withdraw a smaller portion of your retirement plan each year -- only $7,767 from a plan holding $160,000. In the first year alone, this would permit you to continue to invest an additional $2,233 tax free and save more than $700 in income taxes (depending on your tax rate). The savings can be even greater if you name someone younger than yourself as a designated beneficiary, but if you choose someone who is not your spouse, he or she will always be deemed to be no more than 10 years younger than you.

You can always change designated beneficiaries after you have reached the required beginning date, but they can never be used to reduce your minimum distributions. This means that if you have no designated beneficiary on your required beginning date, you will always be stuck making withdrawals based on your own life expectancy. So, the first rule of retirement plans is to always designate a beneficiary.

Part 2: To Fix or Recalculate, that is the question.

Cohen & Oalican, LLP provide a full spectrum of services for the elderly, for disabled adults, and for the families.