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Federal law requires most people in tax-favored retirement plans to
start receiving benefits by April 1 following the later of the year they
reach age 70½, or retire. This applies to plans established under IRC
sections 401(a), 401(k), 403(a), 403(b), and 457(b).
Clients concerned with estate preservation may be interested in TIAA-CREF's
Minimum Distribution Option. Under the MDO, TIAA-CREF pays the minimum
income the IRS requires each year, without converting the accumulation
into a lifetime annuity. If the "minimum distribution" requirement isn't
met, your client may have to pay a nondeductible penalty tax equal to
half of the amount that should have been distributed, but wasn't.
Grandfathered Accumulation
The accumulation in a 403(b) account as of December 31, 1986 is
"grandfathered" for minimum distribution purposes. Clients with grandfathered
funds don't have to begin distributions from those funds until the later of the year
they attain age 75 or separate from service. After that, "grandfathered" accumulations are automatically
subject to minimum distribution requirements.
There are no grandfathered funds in a qualified plan. Anyone
participating in qualified 403(a), 401(a), or 401(k) plans must
begin distributions on the total amount of the accumulation as
of the December 31st prior to the distribution year.
MDO Calculation
The amount that must be distributed each year depends in part on whether or not your client
chooses his or her spouse as the sole beneficiary, and if so, whether that spouse is more
than 10 years younger than him or her. TIAA-CREF can provide illustrations on request, or
you can use our
online calculator provided you have all the necessary information to complete the entry screen.
The MDO payment is calculated automatically each year. The MDO contract
does not guarantee lifetime income.
Choosing a Calculation Beneficiary
All minimum distributions are made over the life expectancy of the
employee and a beneficiary 10 years younger. The exception is if the
spouse beneficiary is more than 10 years younger. Then the minimum required
distribution is determined under the Table for Joint Life Expectancy at
actual ages. (Your client can also name
several beneficiaries; however, the one with the shortest life expectancy
will be the calculation beneficiary unless separate accounts are established
with respect to each beneficiary.)
Federal Taxation
Your clients have the following federal tax withholding options:
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Withhold a percentage of the MDO payment, up to 99 percent. |
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Elect no withholding. |
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Elect the standard 10 percent withholding. |
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Withhold a flat dollar amount, but no more than the MDO payment itself. |
Participants can elect to withhold state tax on their MDO payments. The
same states that mandate withholding for life annuities apply the same
rules to the MDO, with the exception of Georgia, where no state tax on
minimum distributions applies.
The MDO payment is calculated automatically each year.
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