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Friday, April 29, 2016
Our TDA And The Required Minimum Distribution.
One of the advantages of being a New York City teacher is our TDA. According to a UFT pension consultant, the average TDA at retirement is $320,000. While many of the teachers retire as early as 55 years of age, many wait until full retirement age of 62 or even older, if they are second career teachers. The question is what happens next?
Once a retiree teacher and reaches the age of 70.5 the TDA, which is a tax deferred 403(b) plan, has to start being withdrawn and pay federal taxes (If residing in New York State the TDA is exempt from paying state and local taxes). For example if you reach the age of 70.5 on January 10th of 2017, you must take a Required Minimum Distribution (RMD) by December 31, 2017 or suffer a significant penalty (50% excise tax). Therefore, you must take out the required RMD as required by the IRS or you will be giving away money for free to the federal government. Finally, every subsequent year a RMD must be withdrawn by the end of each year (December 31, 2017) thereafter or suffer a penalty. In the first year you turn 70.5 years of age you can take the distribution as late as April 15th of the next year. However, you will then be forced to take another one on December 31st of that year and raise your tax burden for the two withdrawals.
How does the RMD work? It is based upon life expectancy annuity tables and requires a percentage be taken out as a function of your age. The percentage of your TDA needed to withdraw to satisfy the IRS RMD by age is listed below.
For example, if you are 70.5 years of age and have the average TDA sum of $320,000 then the RMD will be $11,680 ($320,000 x 0.0365). On the other hand if the retiree is 85 years of age than the RMD withdrawal would be $21,532 ($320,000 x 0.0676). You can use the IRS worksheet table supplied Here.
The RMD is not only for our TDA, it includes almost all tax deferred plans, 401(k), 457(b), 403(b), IRAs. The RMD is the federal government's way of making sure you pay your taxes, be it now or later. The RMD is not required for any Roth accounts but when the retiree dies, then the federal government will tax the beneficiaries. Remember all your tax deferred accounts are subject to the RMD and the RMD must be calculated for each account every year.