Educating Older Workers on the ABCs of RMDs

February 21, 2012

With the yearly chore of tax filing upon us, all those year-end retirement account statements can become quite confusing for your group of employees who have chosen to remain in the workforce into their seventies. Which accounts can they still contribute to? Which accounts do they need to take a withdrawal from?

Once an employee reaches age 70 ½, no matter what their employment status is, they must begin taking the IRS’s required minimum distribution (RMD) from any traditional IRA, SEP account, or SIMPLE IRA that they own. The account owner can push off taking their first RMD until April 1 of the year after reaching 70 ½, but then they have to take two withdrawals in that year. For an employee who is still working full-time, this can have a significant tax impact and even increase their marginal tax bracket. Luckily, active employees who work beyond 70 ½ are NOT subject to an RMD on their qualified employer sponsored plan, which would include a profit sharing plan, a 401(k), or a 403(b) plan. The only exception to this postponement of withdrawals on an employer-sponsored plan would be for those who are considered self-employed or are at least a 5% owner of the business, even if the business owner works beyond age 70 ½.

Your silver workforce is hungry for tips on managing their retirement accounts, so here are some strategies to share with them:

If your plan accepts IRA rollovers, an employee can postpone taking the RMD that would have been required on their traditional IRA if they roll the IRA balance to your 401(k) plan. This will then enable the worker who has reached 70 ½ to wait until they are actually retired before having to take taxable distributions from their retirement account.
Although contributions can no longer be made to a traditional IRA once an employee turns 70 ½, contributions CAN still be made to their employer-sponsored plan at work or to a Roth IRA, as long as they are still actively employed. For workers in their seventies, they can contribute as much as $22,500 to a 401(k) and up to $6,000 to their Roth IRA in 2012. I’ve heard many older employees say that they are too old to benefit from a Roth IRA, but from an estate planning point of view, Roth IRAs are a great way to pass on a tax-free inheritance.
For employees that are charitably inclined, it may make sense to designate their favorite charity as the beneficiary of their tax-deferred retirement account and leave other assets that have the benefit of the step-up basis to their loved ones. Since a charity would not pay income tax on the receipt of the retirement account, less money goes to the IRS. If the employee is married, their spouse would need to sign off on the designation of the charity instead of the more common spousal beneficiary designation.

What’s the best way to share this information? I’ve found that the majority of pre-retirees would prefer the chance to sit down and have an on-site financial counseling session with a financial planner who is familiar with their benefits package. Workshops are also quite popular, and work best when your workforce is segregated based on their age and proximity to retirement. At the very least, a timely tax tips newsletter can go a long way in adding to your workforce’s appreciation of your retirement plan communications.