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’s Minimum Distribution Option. Under the MDO, TIAA 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.
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.
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 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.
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.)
Your clients have the following federal tax withholding options:
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.
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.