Required Minimum Distributions Explained

Required Minimum Distributions Explained

 

Are you planning to leave funds in your Thrift Savings Plan (TSP) after you retire? Though this is advantageous for several reasons, money in that account cannot remain untouched forever. In fact, it is required that participants make annual minimum distributions (RMD) from those accounts. Federal Educators explains how this process works and what to take note of before your retirement begins.

 

The Thrift Savings Plan (TSP) is an affordable platform where all federal employees can leave funds after retirement. However, many federal employees are unaware that a required minimum donation (RMD) must be taken out from their TSP accounts beginning April 1st of the year after the employee reaches 72 years old and every year after. This rule is critical and can have serious tax implications.

 

Where can you draw the funds from? Required minimum distributions can be withdrawn from TSP, 401(k)s and IRAs. For any federal retiree, RMDs should be taken from both traditional and ROTH TSPs as well as a traditional IRA. Your RMD’s calculation consists of three components: the account holder’s age, the prior year-end balance and the IRS Uniform Lifetime table. Because the only variable in this calculation is the prior year-end balance, Federal Educators can assist with strategies to optimize this element.

 

For example, Bob is 71 years old. He retired under FERS and receives a monthly annuity and social security. He has no need to draw from his investments. However, this year when he reaches 72 years old, the government will require him to begin taking a Required Minimum Donation from his Thrift Savings Plan, 401k and IRAs. This means he must draw money from his tax-deferred accounts and pay tax on them the following year. But, he does not need this money for expenses so what should he do?

 

In Bob’s case, there are a couple of options if the RMD money is not needed for expenses. He may choose to put it in an account where earnings will be taxed every year or in order to reduce future RMD amounts, some of his tax-deferred savings could be converted to a ROTH IRA. Currently, there are no RMD stipulations for a ROTH IRA. The latter is a great option for those that want to leave an inheritance to children or grandchildren. These are just a few ideas that may work for your financial situation as well.

 

During our complimentary benefits analysis, Federal Educators can recommend the best financial plan for your RMD distributions. Give our Tampa office a call at (813) 544-2908 to get started today.