for Today's Pensions
observers have commented that few private
sector workers can look forward to pensions
after retirement. The traditional pension,
a lifelong stream of income to a retiree
and perhaps a surviving spouse, is becoming
a rarity for those who are not long-term
millions of people do have a form of pension
these days, one that kicks in after age
7014. At that age, required minimum distributions
(RMDs) typically begin from retirement
plans, such as traditional IRAs and 401(k)s.
With proper planning, RMDs can serve as
a long-term pension and also provide benefits
to a surviving spouse.
Beyond age 70 1/2, you generally must
withdraw at least a certain amount from
your retirement plan each year. The number
is based on your age and the account balance
at the end of the previous year. Any shortfall
triggers a 50% penalty.
1: Craig Jackson will reach age 70
this July, so he'll be 70 1/2 in January
2017. His first RMD will be for 2017,
based on his December 31, 2016, IRA balance.
IRA balance will be $600,000 then. He
can go to the IRS "Uniform Lifetime
Table" and find age 71: the age he'll
turn in 2017. The IRS table shows a "distribution
period" of 26.5 years at 71, so Craig
will divide his $600,000 IRA balance by
26.5, to get $22,642, his RMD for the
year. (IRA owners whose spouse is their
sole beneficiary and is more than 10 years
younger use a different table, resulting
in a smaller RMD.)
withdraw a larger amount in 2017, but
a smaller distribution will be penalized.
If his 2017 IRA distributions total $10,000,
he'll lag the RMD by $12,642 and owe a
50% penalty: $6,321.
Craig will repeat the process, using the
relevant distribution period and IRA balance.
In the year he turns 76, for instance,
the distribution period will be 22 years,
reflecting a reduced life expectancy.
If Craig has a $440,000 IRA balance on
the previous December 31, his RMD would
be $440,000/22, or $20,000 that year.
By following the RMD guidelines, Craig
can construct a do-it-himself pension.
He can contact his IRA custodian early
in 2017, determine his RMD for the year,
and request the annual amount to be paid
in monthly installments.
2: In our previous example, Craig's
2017 RMD will be $22,642. That's $1,887
per month, for 12 months. Craig can have
the IRA custodian transfer that amount
into his checking account each month,
which effectively would provide him a
pension for the year. The monthly RMD
payouts would vary in future years, as
explained. RMDs from traditional IRAs
generally are fully or mostly taxable,
so Craig can choose to have taxes withheld,
reducing the monthly deposit. Alternatively,
Craig can receive the full RMD each month
and make quarterly estimated tax payments.
IRS table in this manner, year after year,
Craig will never deplete his IRA, so he'll
always have monthly cash flow. If he reaches
age 90, for example, the distribution
period on the uniform table will be 11.4
years, meaning that Craig's RMD will be
about 8.8% of his IRA.
can stay in the IRA, growing tax-deferred.
wife, Dana, survives him, and Dana is
the sole IRA beneficiary, she can roll
Craig's IRA into her own name. Then Dana
can have her own RMD schedule-her own
lifelong pension-in addition to RMDs from
any IRAs Dana already has established
Dana and Craig can take more than the
RMD obligation each year. As long as they
are older than 59V2, there will be no
early withdrawal penalties. However, taking
more than the RMD likely will increase
the tax bill and reduce the amount of
future cash flow from IRAs.
If you don't need money from your IRA
in retirement, following the RMD table
is the best way to minimize unwanted taxes.
But what if you are relying on those funds
for a comfortable lifestyle after you
stop working? Then the IRS table can deliver
a practical guideline for tapping your
the table, you will withdraw more from
your IRA after a period of successful
investing, and less after a market pullback
has devalued the account. You won't have
to worry about how much or how little
to take out, with every hiccup of the
financial markets. RMD-based IRA withdrawals,
along with Social Security checks, can
provide a lifetime stream of cash flow.
June 2016 AICPA Client Bulletin