Federal law requires most participants in tax-favored retirement plans to begin withdrawing the required minimum amount in the year in which they turn 70½ or retire, whichever is later. Participants can defer the initial payment to April 1 of the following year; however, they will have two distributions in that year.
Clients concerned with estate preservation may be interested in TIAA’s Minimum Distribution Option (MDO). Under the MDO, TIAA pays the minimum income required by the IRS 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.
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 year they attain age 75 or separate from service, whichever is later. After that, "grandfathered" accumulations are automatically subject to minimum distribution requirements.
Qualified plans do not contain grandfathered funds. Participants in qualified 403(a), 401(a) or 401(k) plans must begin distributions on the total accumulation as of the December 31 prior to the distribution year.
The amount that must be distributed each year depends in part on whether your client’s spouse is his or her sole beneficiary, and if so, whether the spouse is ten or more years younger than your client. TIAA can provide illustrations on request, or you can use our online calculator given that you have all the information needed to complete the entry screen.
The MDO payment is calculated automatically each year. The MDO contract does not guarantee lifetime income.
All minimum distributions are made over the life expectancy of the employee and a beneficiary up to ten years younger. If the spouse beneficiary is more than ten years younger, the minimum required distribution is determined under the Table for Joint Life Expectancy at actual ages.
Your clients have the following federal tax withholding options:
Participants can elect to withhold state tax on their MDO payments. States that mandate withholding for life annuities apply the same rules to the MDO, with the exception of Georgia, which applies no state tax on minimum distributions.
The MDO payment is automatically calculated each year.
The tax information contained here is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. It was written to support the promotion of the products and services addressed herein. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
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