Retired Teachers Chapter News
Simplified IRS rules a plus for retirees
May 8, 2008 4:18 PM
I have asked Mel Aaronson, Sandra March and Mona Romain, teacher members of the New York City Teachers’ Retirement Board, to write about some of the IRS rules that affect retirees.
—Tom Pappas, chapter leader
By MEL AARONSON, SANDRA MARCH and MONA ROMAIN
In response to our members’ needs and at their request, the UFT had obtained for members of the Teachers’ Retirement System the right to take Required Minimum Distributions from their Tax-Deferred Annuity accounts.
An RMD is the smallest distribution retired members can take from their TDA account after reaching the age of 701/2 without incurring a tax penalty. Of course, all withdrawals are subject to regular income taxes.
In 1995, the UFT succeeded in getting members the right to take RMDs each year. New members who have deferred their TDAs can take advantage of the IRS’s RMD rules. TRS will notify members eligible for RMD what their rights are.
In 1998, the UFT prompted legislation that allowed retired TDA participants to defer moving their TDA accounts from TRS. The deferral lasted until the year the member reached age 75 for those who had TDA accounts on Dec. 31, 1986, and age 70 for amounts accumulated after that date. At age 70, retired members had to remove the entire post-1986 balance or annuitize their account, and at age 75 remove the remainder of the account or annuitize it.
The IRS has dramatically simplified the rules retirees must use to determine their RMD. For most people, withdrawals are smaller than under the old rules. This allows the remaining account balance to be reduced more slowly and to preserve its tax-favored status that much longer.
Between ages 59 (55 if you are retired) and 70, you generally may remove as little or as much from your TDA account as you desire. You will not be required to pay any IRS tax penalty; however, you will be required to pay federal income tax and perhaps state and local income taxes.
But when you reach age 70 you have until April 1 of the next calendar year to take an RMD. You may always take larger withdrawals than the RMD. Failure to take the RMD can result in a heavy (50 percent) tax penalty on any money that was required to be withdrawn but was not, in addition to regular taxes.
Delaying the first distribution to April 1 of the next calendar year is not always a good idea. You should contact your tax advisor to see whether it is to your advantage to have two taxable distributions in the same year
No longer are members required to choose one of five complex methods to calculate their RMD. The new method requires that retirees consult a single table to know how much to withdraw. A 70-year-old member can now divide the TDA balance by 27.4 in order to calculate the RMD.
Under the old rules, a single person had to divide the TDA balance by 16. That’s a significant difference. With a balance of, say, $100,000, the RMD was $6,250 under the old rules and $3,650 today. In the 27 percent federal tax bracket, this saves a person more than $700 in this year alone. Anyone can withdraw more than the minimum at any time.
Where the spouse is the sole beneficiary and is not more than 10 years younger than you, the amount of the withdrawal does not depend on the age of the beneficiary. You can choose anyone now to be your primary beneficiary without affecting the size of your RMD.
CAUTION: This material is our general understanding of the IRS regulations. The discussion should not be construed as legal advice — you should get that from your tax advisor. Neither the UFT nor the TRS can legally give advice in this area.
