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? |
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IRA/SEP IRA |
Note: If both pre- and after-tax contributions have been made, distributions are taken from both proportionally. |
SIMPLE IRA |
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Roth 401(k), Roth 403(b) |
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What is the penalty for early withdrawals? |
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IRA/SEP IRA |
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SIMPLE IRA |
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Roth 401(k), Roth 403(b) |
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Do Required Minimum Distribution (RMD) rules apply? |
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IRA/SEP IRA |
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SIMPLE IRA |
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Roth 401(k), Roth 403(b) |
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Employer-sponsored plan distributions
How are distributions taxed? |
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401(k), 403(b), Profit Sharing, Defined Benefit |
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457(b) |
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Roth 401(k), Roth 403(b) |
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What is the penalty for early withdrawals? |
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401(k), 403(b), Profit Sharing, Defined Benefit |
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457(b) |
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Roth 401(k), Roth 403(b) |
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Is there a Required Minimum Distribution (RMD)? |
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401(k), 403(b), Profit Sharing, Defined Benefit |
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457(b) |
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Roth 401(k), Roth 403(b) |
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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: |
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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.
