Retirement income planning

Key Points

  • To cover expenses, you'll likely need to draw from retirement savings plans.
  • Distributions are handled differently depending on the account and most plans have required minimum distributions (RMDs).
  • Pension payments may be partially protected by the government.

To cover essential and lifestyle expenses, most people in retirement begin drawing some income from their retirement accounts. Even if you don't need the money now, you are required by law to begin taking distributions from many types of retirement accounts starting by April 1 of the year after you turn 72.

Before you draw income from your retirement savings plans, it's important to understand the rules governing distributions. This may also be a good time to consider the pros and cons of rolling assets from your workplace plan into an IRA to consolidate accounts.

Understand retirement distribution guidelines

  • To take distributions from most 401(k), 403(b), 457(b) and profit sharing plans, you generally must leave your job (separate from service) or reach age 59 ½.
  • A 10% IRS penalty may apply to taking early distributions from most retirement plans. Note: 457(b) plans don't carry this penalty.
  • Distributions are generally taxable as income. However, you can take tax-free distributions from a Roth if you've participated in the plan for at least five years and reached age 59 ½.
  • Most plans require that you start taking Required Minimum Distributions (RMDs) by April 1 of the year following the calendar year you reach age 72, regardless of whether you remain employed. These distributions are based on your life expectancy and your account balance at the end of the previous year. RMDs are usually taxable, and there is a 50% penalty on the amount not taken if you skip them or take less than the required amount.

IRA distributions

 

How are distributions taxed?

IRA/SEP IRA
  • Distributions of pre-tax contributions and earnings are taxed as income.
  • Distributions of after-tax contributions are not subject to income tax.

Note:  If both pre- and after-tax contributions have been made, distributions are taken from both proportionally.

SIMPLE IRA
  • Distributions are taxed as income
Roth 401(k), Roth 403(b)
  • Distributions of contributions and conversion assets are always income tax-free.
  • Qualified distributions of earnings are tax-free.
  • Non-qualified distributions of earnings are taxed as income.
  • Contributions are distributed first, followed by conversion assets and earnings.

 

What is the penalty for early withdrawals? 

IRA/SEP IRA
  • A 10% penalty may apply to taxable distributions made prior to age 59 ½ (exceptions apply).
SIMPLE IRA
  • A 25% penalty may apply to taxable distributions prior to age 59 ½ if distributions are taken within two years from the date you first participated in the SIMPLE IRA (exceptions apply).
  • A 10% penalty may apply to taxable distributions prior to age 59 ½ if you have participated in the SIMPLE IRA for more than two years (exceptions apply).
Roth 401(k), Roth 403(b)
  • A 10% penalty may apply to distributions of conversion assets made within five years of conversion and prior to age 59 ½ (exceptions apply).
  • A 10% penalty may apply to taxable distributions of earnings prior to age 59 ½ (exceptions apply).

 

Do Required Minimum Distribution (RMD) rules apply? 

IRA/SEP IRA
  • RMDs must begin by April 1 of the year following the calendar year you turn age 72, regardless of whether you remain employed.
SIMPLE IRA
  • RMDs must begin by April 1 of the year following the calendar year you turn age 72, regardless of whether you remain employed.
Roth 401(k), Roth 403(b)
  • No RMDs for the original owner.
  • Non-spouse beneficiaries are subject to RMDs.

Employer-sponsored plan distributions

How are distributions taxed?

401(k), 403(b), Profit Sharing, Defined Benefit
  • Distributions of pre-tax contributions and earnings are taxed as income in the year distributed.
  • Distributions of after-tax contributions are not subject to income tax.
457(b)
  • Distributions are taxed as income in the year distributed.
Roth 401(k), Roth 403(b)
  • Distributions of contributions are tax-free.
  • Qualified distributions of earnings are tax-free.
  • Non-qualified distributions of earnings are reportable as income.
  • Contributions and earnings are distributed proportionately.

 

What is the penalty for early withdrawals?

401(k), 403(b), Profit Sharing, Defined Benefit
  • A 10% penalty may apply to the taxable portion if you are not yet age 59 1/2 (exceptions apply) or if you have terminated from employment prior to the year you turned 55.1
457(b)
  • No penalty.
Roth 401(k), Roth 403(b)
  • A 10% penalty may apply to the taxable portion of non-qualified distributions if you are not yet age 59 1/2 (exceptions apply) or if you have terminated from employment prior to the year you turned 55.

 

Is there a Required Minimum Distribution (RMD)?

401(k), 403(b), Profit Sharing, Defined Benefit
  • If you are not a 5% or greater owner of the business, RMDs must begin by the later of April 1 of the calendar year following the year you turn 72 or the year you retire.
  • You must begin RMDs by April 1 of the year following the year you turn 72 if you are a 5% or greater owner of the business.
457(b)
  • RMDs must begin by the later of April 1 of the calendar year following the year you turn 72 or the year you retire.
Roth 401(k), Roth 403(b)
  • If you are not a 5% or greater owner of the business, RMDs must begin by the later of April 1 of the calendar year following the year you turn 72 or the year you retire.
  • You must begin RMDs by April 1 of the year following the year you turn 72 if you are a 5% or greater owner of the business.

1 For public safety workers in governmental plans, the 10% penalty is waived if separation from service occurs in the year they turned 50 or older.

Pension payments

The Pension Benefit Guaranty Corporation (PBGC) is a federal corporation that protects the pensions of nearly 40 million American workers and retirees in more than 24,000 private single-employer and multi-employer defined benefit pension plans.

If your company fails to or cannot make your pension payments, the PBGC guarantees "basic benefits" earned before your plan's termination date (or the date your employer's bankruptcy proceeding began, if applicable). For more information on pension payment guarantees go to PBGC.gov. 

The PBGC guarantees basic benefits including:

The PBGC does not guarantee:

  • Pension benefits at normal retirement age
  • Most early retirement benefits
  • Annuity benefits for survivors of plan participants
  • Disability benefits (see exception to the right)
  • Disability benefits for a disability that occurs after the plan's termination date (or the date your employer's bankruptcy proceeding began, if applicable)
  • Health and welfare benefits
  • Vacation pay
  • Severance benefits
  • Lump-sum death benefits for a death that occurs after the date the plan ended

 

Get help with distributions

Deciding how and when to take distributions from your retirement plans is a major issue for many retirees. An Ameriprise financial advisor can help you evaluate your options, and decide on an approach that best serves your particular needs.

Pyramid

Find answers to your retirement questions

Take the 3-Minute Confident Retirement® check

Be sure you understand the potential benefits and risks of an IRA rollover before implementing. As with any decision that has tax implications, you should consult with your tax adviser prior to implementing an IRA rollover."
A Roth IRA is tax free as long as you leave the money in the account for at least 5 years and are 59 1/2 or older when you take distributions or meet another qualifying event, such as death, disability or purchase of a first home up to $10,000.
Ameriprise Financial, Inc., and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.