Like a growing number of Americans, you may be considering working longer than planned--even well into your 70s. Perhaps you'd like to save a bit more for retirement, or perhaps the grant funding on your last major project will last until you're 73, or it could be the case that you simply still enjoy what you're doing and can't imagine what you'd do in retirement.
Regardless of why you choose to continue working, it’s important to keep in mind that continuing to work after age 70 ½ can have unintended tax consequences. That’s because at age 70 1/2 you must start taking Required Minimum Distributions (aka RMDs) from some of your retirement plans, whether you need the income or not. Having to take RMDs when you don't need the income may unnecessarily increase your tax liability for the current year.
That said, there is a simple way to delay some, if not all, of your RMDs from your various retirement accounts while you're still working.
Required Minimum Distributions - A Quick Overview
Required Minimum Distributions are withdrawals that the IRS requires you to make from certain retirement accounts - particularly 403(b), 457(b), 401(k), and ORP plans as well as Traditional IRAs - once you reach age 70 1/2. The amount you must take out is determined by your account balance as of 12/31 of the previous year and your applicable IRS table. For your first RMD, you can wait until April 1st of the year after you turn 70 1/2 to take your RMD. However, all subsequent years' RMDs must be taken by December 31 of the current year. (*This is just a summary and not intended to be taken as tax advice. Consult your tax professional in regard to how this may apply to your unique circumstances.)
The Downside of Taking RMDs While You're Still Working
One downside of taking RMDs while you are still working is that it may increase your taxable income and potentially increase your current year's tax liability. This extra income could also push you into a higher tax bracket, possibly resulting in a higher tax rate on all of your taxable income for the year.
Delay Your RMDs Past Age 70 1/2 While You're Still Working
Fortunately, there's a simple way to delay having to take your RMDs at age 70 1/2. The IRS does not require
A simple solution to delay taking your RMDs from your old retirement accounts is to simply roll those old accounts into your current employer's retirement plans, thereby delaying those RMDs until you retire or otherwise stop working at that institution.
Here's how it works. Let's say an unmarried 72-year-old professor currently working at UNC has an income of $165,000 per year and has a 403(b) at a former higher education institution that had a balance of $500,000 on 12/31 of the previous year. Using simple numbers, if he rolled that old 403(b) into his current UNC 403(b), after taking the standard deduction of $12,200, his taxable income would be $152,800. However, if he leaves his old 403(b) at his old institution, using the TIAA Minimum Distribution Calculator, he would be required to take RMDs of approximately $20,000 from the old 403b thereby raising his taxable income from $152,800 to $172,800. Using the 2019 tax brackets, this would bump him up from a 22% tax bracket to a 24% tax bracket, which would result in an extra $6,000 in current-year federal taxes due. In other words, simply rolling his old 403(b) into his current 403(b) would save him approximately $6,000 in current year taxes. (*This is a simplified example used for illustrative purposes only. Again, consult your tax professional in regard to how this may apply to your unique circumstances.)
Is this the Right Strategy for You?
Before making the decision to your old IRA, 403(b), 457(b), 401(k), or ORP plans into your current university retirement plan in order to delay your RMDs from those accounts, it's important to understand exactly how your benefits work to avoid unintentional consequences. That's because some ORP plans require plan participants to maintain a balance in the plan to retain associated retiree health insurance benefits. Rolling the money out of those plans may cause you to lose those benefits (see Leaving UNC?... Don't Lose Your Retiree Health Insurance!).
In addition, the particular products that are inside of your old retirement plans may have product-specific benefits that you may lose upon rolling the accounts over. For example, an annuity-based old 403(b) account may have a guaranteed death benefit or minimum guaranteed withdrawal benefits that you may not want to forfeit, depending on your circumstances.
Also, some employer plans will only accept the same type of plan to be rolled into that plan (i.e. only ORP-into-ORP plans, or 457b-into-457b plans).
Need Help Determining The Best Course Of Action For You?
Keep in mind that this article is just a summary.
If you're not sure what to do in your unique situation, just click Schedule An Introductory Call and we can help you determine whether rolling your old retirement plans into your current employer retirement plan makes sense for you.
Peter Hynes, CFP®
Verity Asset Management