7. How Should I Draw Income from My Tax-Advantaged Retirement Accounts?

1. Your Retirement Vision
2. Estimate Your Retirement Expenses
3. Paying for Health and Long-term Care
4. Your Defined Benefit Pension
5. Social Security Benefits
6. Estimate How Long Your Resources Will Last
7. Drawing Income from Tax-Advantaged Accounts
8. Managing Taxes
9. Manage Your Investments
10. Should You Consult Professionals?

As a participant in a 457 deferred compensation plan and/or a 401(a) defined compensation plan, you manage the funds in your accounts and you decide when and how much to withdraw. You face many important decisions, including these:

Developing a withdrawal plan
Determining from which accounts to withdraw funds
Managing your taxes

Developing A Withdrawal Plan

Before you make a plan to withdraw money from your retirement accounts, ask yourself how will this money be used. Your answer will help direct how and when the money should be withdrawn. Perhaps you need...

To provide extra income for the years before Social Security payments begin.
To help pay health care costs, especially before Medicare starts.
To pay for a dream vacation during the next decade.
To help pay for grandchildren’s education starting in 15 years.
To generate steady income for a long life, maybe 30 years or so.
To buy a recreational vehicle.
To save for long-term care or other financial emergencies in the latter years.
To pay off debts right away.

Money under your control, such as your 457 plan or other retirement accounts, is there to help meet these needs. But using this money effectively takes planning.

If your retirement savings account is administered by ICMA-RC, you have the most flexible options available under the law. You determine the payment schedule that’s right for you. With an ICMA-RC 457 deferred compensation plan, even after you begin receiving payments, you can make changes to your schedule. You can stop, restart, increase, or decrease your payments as your financial needs change. Contact Investor Services toll-free at 800-669-7400 for complete information, including a withdrawal packet that contains all the necessary forms.

Depending on your plan, your payment options may include the following:

Periodic payments over a specified number of years, over your life expectancy, or of a specified amount until the accounts are exhausted with or without an annual COLA
A rollover to another plan or a traditional IRA, including ICMA-RC’s Vantagepoint IRA
A full or partial lump sum payment

In addition to a systematic withdrawal schedule, you might decide to purchase an annuity if your goal is to ensure that you (and perhaps your spouse) will always get regular income no matter how long you live. Public employees who have the option of purchasing defined benefit pension service credit should compare this option to any annuity they may consider.

Immediate-payment fixed annuities are insurance products that can be thought of as longevity insurance. They carry the issuing company’s guarantee that they will pay you a regular income stream, usually monthly, for life or for the joint lives of you and your spouse. You buy the contract with a lump sum payment to the insurance company.

Consider these factors before buying any annuity:

The annuity is only as safe as the insurance company, so deal only with very highly rated insurance firms.
Fixed annuities will not keep up with inflation.
Variable annuities have market risk and can lose value.
Some annuities have high costs, including sales charges and high surrender charges (a penalty for early termination of the annuity).
Depending on the annuity contract details, remaining funds may not become a part of your estate.

Will you be taking required minimum distributions? Most retirement accounts are subject to the minimum distribution requirements. Distributions from these accounts must begin by April 1 of the year following the year in which the owner reaches age 70½, unless he or she is still working for the employer. If still working for the sponsoring employer, distributions can be delayed until April 1 of the year after he or she retires. The RMD is calculated by dividing the account balance at year-end by life expectancy from the IRS life table (found in IRS Publication 590).

For example, a retirement account of $100,000 on the last day of the year that is owned by a single person who turns age 75 during the year has a required distribution the following year of $7,463. This amount is calculated by dividing the life expectancy of 13.4 years (for a person who is either single or married, with the spouse being less than 10 years younger), found in IRS Publication 590, into the $100,000 end-of-year balance for the previous year. Life expectancy does not decrease by one each year. The following year, the new life expectancy is 12.7 and that will be divided into the new end-of-year balance.

A 50 percent penalty tax applies to shortfalls from minimum distributions. If a retiree took distributions of $10,000 one year but should have taken $15,000 that year, the penalty is $2,500 ($5,000 shortfall times 50 percent).