Be careful when withdrawing retirement funds
Learn the rules around your savings when it comes to withdrawalsBy Doreen Friel
You've spent a lot of time planning your financial future by contributing to a retirement plan. But what do you do when the future arrives? It's important to know the rules around your savings when it comes to withdrawals.
Age isn't just a number
When it comes to pulling money from your retirement plan, it can cost you dearly if you don't play by the rules. The federal government requires you to begin withdrawing money from your plan account by April 1 after you've turned age 70 and a half. (This does not apply to money you may have in a Roth IRA or money you've contributed to a Roth investment option of your employer-sponsored retirement plan.) And you must withdraw at least the minimum amount required (called the "required minimum distribution" or "RMD") at that time and once a year thereafter — or you'll have to pay a fee equal to 50 percent of the amount you should have withdrawn, but didn't.
Your withdrawals will be taxable
You'll owe federal income tax on the money you withdraw. (As above, this does not apply to qualified Roth IRA distributions or qualified distributions from money you've contributed to a Roth investment option of your employer-sponsored retirement plan. As far as state taxes, laws vary by state. In North Carolina, qualified Roth distributions are not taxed.) So keep that in mind when deciding how much to withdraw. Generally speaking, the less you withdraw each year — keeping your RMD in mind — the less you'll owe in income taxes each year, and the longer your money will last.
Be sure to designate a beneficiary
Your will does not determine who will receive the money in your retirement account when you die; your beneficiary designation does. Federal law requires that your beneficiary be your spouse if you are married (unless your spouse consents to a different designation). If you do not name a beneficiary, the individual who does inherit your retirement plan assets may receive less favorable tax treatment on the money in your account.
Your beneficiary must pay income tax on any money received from your account
Knowing this can help you decide how quickly you want to withdraw your money. For example, you may wish to consider the tax effects of withdrawing the money (and paying taxes at your income tax rate) or potentially leaving more money in your account, which means your beneficiary would have to pay taxes at their income tax rate on any money they receive after your death.
Clearly, rules surrounding withdrawing money from your retirement plan account — both while you are living and after you've passed away — are complex. That's why it's important to consult your financial or tax adviser now. Doing so would enable you to create a distribution strategy that's tailored to your personal situation.
North Carolina Resource
For more financial information about retirement, the North Carolina Department of State Treasurer's website provides planning information for the general public as well as plan-specific information for state employees and teachers. Go to www.nctreasurer.com and click on the Retirement header on the main page, and then click on the NC Retirement Planning link, where you'll find information about rates of return, a glossary of terms, and a list of links to helpful, finance-oriented websites for magazines such as Smart Money and organizations such as the American Savings Educational Council. For more information about state and federal taxes, visit the North Carolina Department of Revenue at www.dornc.com and the Internal Revenue Service at www.irs.gov.