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November 25, 2015

Retirees forced to withdraw portion of TIAA-CREF funds

TIAACref benefitsAfter reading about the state of Pitt retirement accounts — a presentation given by Jay Mahoney, relationship manager in TIAA-CREF’s Pittsburgh office, to a meeting of the Senate benefits and welfare committee and reported in the Oct. 1 University Times — one recently retired professor felt an important fact was missing from the presentation.

When the professor retired she was surprised to learn that the IRS forces those with Pitt-sponsored TIAA-CREF and Vanguard retirement accounts, as well as non-Pitt IRAs, to take a minimum distribution from their accounts each year and then pay federal taxes on it.

The IRS policy applies to staff as well as faculty.

“I must take that amount out,” the faculty member, who did not wish to be identified, wrote to the University Times. “I can take more but not less. Luckily so far, despite these withdrawals, the remaining amount has continued to grow, and since the [required withdrawal] is more than I need, I am still saving money to invest in other ways, just in case.

“Faculty [and staff]should be advised not to use all of what they take out, especially if they are healthy and have family members who made it past 90,” she added.

TIAA-CREF’s Mahoney agrees. The required minimum distribution, under IRS rule 401(a)9, is based on the agency’s life expectancy table, he explains. If the average life expectancy for those age 70 is 17 more years, the IRS adds 10 years, equaling 27, and then requires the 70-year-old retiree to withdraw 1/27th, or a little less than 4 percent, of his or her account value that year.

This amount can be taken out monthly, quarterly or all at once, but must be withdrawn by the end of each calendar year. Otherwise, the IRS imposes a 50 percent tax penalty on the amount the retired employee should have taken out.

Mahoney says his office checks the accounts of retirees required to withdraw the minimum and, if it is not withdrawn, automatically withdraws it and sends it to the account holder.

How many Pitt people does the minimum distribution rule affect? Mahoney isn’t certain, but believes it affects hundreds of former employees. He adds the caveat: “They really need to work with their tax person or accountant to know that they are really satisfying the rules.”

The minimum withdrawal rules, Mahoney adds, do not apply to Roth IRAs, which are funded from after-tax money and thus have tax-free withdrawals. Some retirees choose to shift some of their retirement income to Roth IRAs so that they, not their heirs, will bear the tax burden of anything left to be inherited.

Potential Pitt retirees also may not realize, Mahoney says, that if they are employed by the University beyond age 70  they are not required to take out the minimum distribution until April 1 of the year following the time they terminate employment. People who do not plan to retire until past this age sometimes take their IRAs and roll them into their Pitt plan so they can delay the required minimum withdrawal.

“We get quite a lot of that,” Mahoney says. “If you’re worried about taking the minimum, that’s probably a good thing. It’s only bad if you don’t need the money and you’d rather leave it in place.”

—Marty Levine     

Filed under: Feature,Volume 48 Issue 7

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