When I Retire, How Can I Tap Into My Retirement Fund?
When you retire it's important to know how to access your retirement fund. Withdrawing from your retirement accounts so they provide you a steady income can be challenging. A large percentage of your retirement fund can be subject to income taxes, estate taxes, state taxes, and other expenses. The following information describes the process for accessing your various accounts. Visit FindLaw's Retirement Planning section for additional resources.
Defined Benefit Pension
In a defined benefit pension plan, an employer pays its employee a specific benefit for life beginning at retirement. The benefit amount is calculated based on factors such as age, salary history, and duration of employment. Investment risk and management are under the control of the employer. An excise tax applies if the minimum contribution isn't satisfied or if excess contributions are made to the plan.
You may have to work for a specific length of time, sometimes 10 years, before you have a permanent right to the benefit. This is referred to as "vesting." If you leave your job before fully vesting in your employer's defined benefit plan, you won't receive the full benefit from the plan.
Defined benefit pension plans often allow you to choose how you receive your benefits. Payment options include:
- A single life annuity in which you receive a fixed monthly benefit until you die. After you die, no further payments are made to your survivors.
- A qualified joint and survivor annuity in which you receive a fixed monthly benefit until you die. After you die, your surviving spouse continues to receive benefits (a minimum 50 percent of your benefit) until his or her death.
- A lump-sum payment in which you receive the entire value of your plan in a lump sum; no further payments are made to you or your survivors.
Your monthly benefit may be significantly reduced if you retire early or receive a joint and survivor annuity.
Employees may make contributions to a traditional 401(k) plan on a pre-tax basis and accrue earnings on a tax-deferred basis. This means you don't pay federal or state income taxes on your savings or their investment earnings until you make withdrawals at retirement. You may begin withdrawing money from your account at age 59 1/2 without receiving a penalty. You must begin making withdrawals from your 401(k) by the age of 70 1/2 unless you're still a full-time employee with the employer sponsoring your plan. If you've changed employers, and have multiple accounts, you may roll your accounts into an IRA.
Traditional and Roth IRAs
Traditional and Roth IRAs are established by individual taxpayers who're allowed to contribute compensation up to a set maximum amount. Contributions made to a Traditional IRA may be tax deductible depending on the taxpayer's income, tax filing status, and coverage by an employer-sponsored retirement plan. However, contributions made to a Roth IRA aren't tax-deductible.
In a Roth IRA, your contributions are made with after-tax dollars and your earnings grow tax-free. Taxes are due only if you make withdrawals before you turn 59 1/2 or if the Roth IRA is less than five years old. Traditional IRAs and SIMPLE IRAs generally involve a tax deduction upfront, but as opposed to Roth IRAs, you must begin taking withdrawals, known as required minimum distributions, or RMDs, after you turn 70 1/2. When you do begin making withdrawals, you'll owe ordinary income taxes, and if you fail to make timely RMDs, or if you withdraw less than the required RMD amount, you may be subject to a 50-percent excise tax.
It may be advisable to make withdrawals from taxable retirement accounts first and save your Roth IRA until later in retirement. Withdrawals from your Roth IRA will be tax-free but you may pay more in lost opportunity. When taking distributions it's necessary to consider tax implications and your particular financial situation. You'll need expert financial advice and you may want to contact a Social Security and retirement planning attorney.