Current Pension Topics: Required Distributions For Those Working After 70
By JOEL FRANK

Pre-tax retirement savings plans under Internal Revenue Code Sections 403(b), 457(b) and 401(k), as well as the super-popular IRA, are subject to Required Minimum Distributions (RMD). RMD must commence when you turn age 70-1/2 if no longer employed by the employer offering the plan. If you remain employed after attaining age 70-1/2, these accounts are subject to RMD starting in the year following your severance from employment. Following is some useful information as published on the Web site of the Teachers' Retirement System of the City of New York (TRS). Please note that the information furnished is peculiar to the 403(b)/TDA Plan of the TRS. Most, but not all of it, applies to the Deferred Compensation 457(b) and 401(k) Plan of the City of New York as well as the IRA. I welcome your questions.

Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net.

When am I required to begin receiving a minimum distribution on my TDA funds?

In general, the IRS requires that TDA distributions begin if you have left service (having elected TDA Deferral status) and have reached or will have reached age 70-1/2 by December 31 of a given year. In most cases, you will have to meet minimum distribution requirements for every year that you maintain a TDA balance. The amount you must receive is called your Required Minimum Distribution (RMD).

If you have retired (or are retiring), a TDA annuity would meet your RMD requirements as long as the annual amount of the annuity payment is equal to or greater than your RMD amount for that year. (Note: A separate distribution may be required for the year that you elect to annuitize your TDA funds.)

Comment: Annuitizing your funds requires you to sign over the title to your TDA funds to the TRS. I do not recommend this method of satisfying your annual RMD.

Will I receive notification when I need to take a Required Minimum Distribution (RMD)?

Yes. Each year, TRS sends a comprehensive RMD packet to members who are subject to distribution requirements for the year. This packet includes a letter indicating the RMD amount for that year, as well as an "RMD Election Form" (code TD39).

How is my RMD amount calculated?

Your annual RMD amount for a given year is determined by applying an actuarial factor from an IRS life-expectancy table to your applicable TDA balance. The actuarial factors used to calculate your RMD will change every year, as will the amount of your required distribution. If your spouse is more than 10 years younger than you, and is your sole primary TDA beneficiary, your spouse's date of birth will be factored into your RMD calculation.

If you are a retiree between ages 70-1/2 and 75, your RMD amount is calculated based on your Post-1986 TDA balance as of December 31 of the previous year. Your Post-1986 TDA balance is determined by subtracting your Pre-1987 balance from your total TDA balance as of December 31 of the previous year.

If you are a retiree age 75 or older, your RMD amount is calculated based on your total TDA balance as of December 31 of the previous year.

If I have more than one TDA beneficiary, which one is considered when calculating my RMD?

The only time during your lifetime that an actual beneficiary is used to calculate your RMD is when your spouse is more than ten years younger than you, and is your sole primary TDA beneficiary. Otherwise, your RMD is calculated as if you have a beneficiary who is ten years younger than you. After your death, the life expectancy of your oldest beneficiary is considered when determining your final RMD.

Are there different ways that I can receive my RMD amount?

Yes. You have several choices: You may receive an RMD payment from TRS for the required amount; you may make a Direct Withdrawal of an amount equaling or exceeding your RMD amount; you may elect to annuitize your funds; or you may satisfy the RMD requirement by receiving payments from another Section 403(b) Program.

If I receive a distribution from my IRA, can it take the place of my receiving an RMD from my TDA funds?

No. Only a payment from another Section 403(b) Program can take the place of receiving a distribution from TRS' TDA Program in order to meet RMD requirements.

Is it possible for my TDA beneficiaries to get an annualized RMD payment?

Generally, RMD payments are made only to members. However, after a member dies, the member's beneficiary(ies) may defer distribution of TDA death benefits by establishing a TDA account with TRS. In this case, if the member had been receiving RMD payments, these distributions would continue to be made to the beneficiary(ies) in accordance with Internal Revenue Service (IRS) guidelines.

Can RMD payments be rolled over?

No. They must be received by the member (or, when applicable, a beneficiary who has established a TRS TDA account).

What are the tax consequences of receiving an RMD?

All RMD amounts are taxable in the year in which they are distributed. This is true even in the case of distributions for a given year that are made by the following April 1; they are taxable in that following year even though they represent the preceding year's RMD. On the "RMD Election Form" (code TD39), members may elect the percentage of the RMD amount to be withheld for federal taxes; the percentage must be a whole number from 0 to 100. Any federal tax withheld can be claimed as tax paid on the member's federal income tax return for the year of distribution. For new Direct Withdrawals that are used to meet RMD requirements, 20% withholding will be applied to any amounts distributed in excess of the RMD unless those excess amounts are directly rolled over or directly transferred.

It is important to note that the IRS imposes a 50% excise tax on any amounts that are required distributions for a given year, but are not distributed.

Can I change my RMD options after filing my "RMD Election Form"?

You may change your RMD options by filing a new "RMD Election Form." However, TRS must receive your new form at least 60 days before the expected RMD payment date, based on your elections on the previous form. (For example, if your RMD payment date would have been the last business day of December, TRS must receive a new form by the end of October.)

Do I have to withdraw or roll over my total TDA account balance when I reach age 75? (not applicable to 457(b), 401(k) and IRA)

No. If you maintain a TDA balance through TDA Deferral status, you would need to begin receiving an RMD that is based on your entire TDA balance. If you are receiving your TDA funds as an annuity, your TDA annuity payments would continue as usual.

Comment: So long as you remain in TDA Deferral Status you may roll over your TDA balance to another eligible retirement plan i.e.; IRA.