Clients who are approaching retirement fearing that they haven’t saved enough in their retirement accounts should know that there is a major advantage to simply staying on the job at the employer sponsoring that plan.
The IRS waives the otherwise required minimum annual distribution of 3.65% that kicks in when a person reaches 70 ½ for those who continue to work even a few hours a week for the employer sponsoring the defined-contribution plan.
Those withdrawals, taxed in full as income, can be deferred until a person finally stops working at that job, as long as the plan itself also allows it, and nearly all retirement plans do, as it means more money for the plan provider to manage. The only requirement is that the job not be on a contract basis.
Better yet, most employers also allow older workers to continue making tax-deferred plan contributions, and if the employer offers matching contributions, those continue, too, meaning the client can build up quite an additional nest egg.
Likewise, individual retirement accounts and plans from earlier jobs, which would normally be subject to required minimum distributions, can also be deferred if the client’s current retirement plan allows rollovers of such assets.
“If you can postpone those RMDs, that’s a good plan,” says Bo Bohanan, director of retirement plan consulting at Raymond James Financial in St. Petersburg, Fla.
But he notes that clients will still have to pay taxes on that money eventually, saying that the longer a person works and defers taking and paying taxes on distributions, the bigger the eventual annual RMD when the client retires.
For example, based upon the IRS’ actuarial assumptions, if a person works at the same job until 80, instead of retiring at 70, then instead of making 26 1/2 years’ worth of RMDs at 7.5% per year of the total fund, he or she would have to withdraw all the money in larger increments over 18 1/2 years. Client who work until 90, as some college professors do, have to withdraw it all in 11.4 years.
If a person dies before the fund is all distributed and taxed, the balance goes to heirs, who each have to pay taxes on their share as income.
“We see a lot of this kind of deferral of distribution being done among university teachers,” says David Ray, a managing director and head of institutional retirement plan sales at TIAA-CREF. “In fact we have a name for it: the reluctant retiree.”
Calling the approach “a great untapped strategy,” he adds, “I can’t really think of any downsides.”
Dave Lindorff spent five years as a China correspondent for Businessweek and has written for The Nation and Salon.com
This story is part of a 30-day series on retirement planning strategies.