Academic Assets

Taking Your Questions

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By Bill Losey

Question: Having made it to the magic age of 70 as a professor emeritus, I know I am required to make a withdrawal from my individual retirement account. Here are my questions: How do I determine the amount of the withdrawal? Must it be taken in one lump sum in a given year (2004), or can it be taken in more than one increment in this same year? And do any IRA withdrawals that I have taken in years prior to my attaining the exalted seventh decade count?

Answer: The annual withdrawal you are referring to is known as your "required minimum distribution." Your first withdrawal must be taken by April 1 of the year following the year that you turn 70. After that, you must make the withdrawals every year by December 31.

The withdrawals must come out of retirement savings where taxes have been deferred. That includes accounts such as traditional IRAs, simplified employee-pension IRAs, and employer-sponsored plans such as 401(k) and 403(b) plans. Roth IRAs are exempt from this rule.

For each distribution year, you must divide the ending account balances of the prior year (as of December 31) by a divisor from an Internal Revenue Service table. The IRS has created three tables based on life expectancies to figure the withdrawal amount, which represents a percentage of your IRA based on your age.

There is one table for retirement-plan participants, a second table for married account owners whose spouses are more than 10 years younger, and a third table used by most account holders. That table, also known as the "Uniform Lifetime Table," is for single people and married couples with spouses closer to their own ages (within 10 years).

Let's assume that you turned 70 on May 1 and have a spouse who is 65. And let's say that the balance of your IRA accounts (only for the person who is 70 or older) was $500,000 as of December 31, 2003. To get the amount of your required withdrawal, divide $500,000 by 27.4 (which is the divisor for age 70 on the Uniform Lifetime Table.) The result a required withdrawal of $18,248. You must withdraw that amount by April 1, 2005.

The withdrawal can be taken in a lump sum or in any increments you wish so long as the total is fully withdrawn by the deadline. Realize that you can always take out more than the required amount in a given year, but no credit is given to you in future years for amounts withdrawn in previous years. And any amount you withdrew before you turned 70 has no effect whatsoever.

Making those withdrawals is serious business, so be careful and make sure you know what you're doing. That's because the IRS can sock you with a 50-percent penalty on the required distribution amount if you forget to take it out. For example, if you don't withdraw the required $18,248 from your traditional IRA, the IRS could levy an excess-accumulation tax of $9,124. Ouch!

Naturally, there are a few exceptions to the rules. First, if you have a 401(k) and you still are working for your college or university, you may delay distributions from the 401(k) until April 1 of the year following the year that you retire. That "still working" exception applies to 403(b) plans, too.

If you have 403(b) money from your retirement plan that you accumulated before 1987, a special grandfathering provision allows you to delay withdrawals on that money until age 75. That exception applies only to 403(b)-plan balances as of December 31, 1986. Check with your plan sponsor for specifics to your situation.

I suggest that you work with a tax adviser or a financial professional during the first year or two after you turn 70 to ensure that you get the calculation right. The IRS changed the rules on the required withdrawals and maintains, if you can believe it, that it has simplified them. (You can stop laughing now.)

If you need more information or want to do some reading on the topic, you can also contact the IRS or visit its Web site. Information on required withdrawals can be found in both IRS Publication 575 and IRS Publication 590 (both are available on the IRS Web site). The various life-expectancy tables that I mentioned previously (used to compute withdrawal amounts) can be found in Appendix C of Publication 590.

Question: My husband is a teacher (he's 56) and I am in campus administration (I'm 48). Together, we make less than $100,000 a year. We have two children ages 13 and 16, with the latter going to college in the fall of 2005. We have very little debt. We owe only about $35,000 on our home, and we always pay off our credit cards each month. We have no investments, per se, just our 403(b) and 401(k) plans; we put about $200 to $300 a month into each.

My question is, Do we make enough money to need a financial planner? Is there somewhere to go that tells you how much you should put toward your retirement each year if you want to retire in 5, 10, or 15 years?

Answer: It sounds like you and your husband have things under control. Still, in my opinion, regardless of your age, income, or investments, everyone could use some financial advice, or at least a second opinion. I'm sure you can find financial planners in your area who you can pay by the hour. Or visit www.garrettplanningnetwork.com. The Garrett Planning Network is a nationwide group of professional, fee-only financial advisers. Its members are dedicated to providing competent, unbiased financial advice to people from all walks of life, on an hourly, as-needed basis. They can help you with the answer to your second question. Or, if you prefer, type the words "retirement calculator" into your favorite Internet search engine and you will find plenty of online sources you can use to make the calculations yourself.

Question: I am an assistant professor at a small liberal-arts college in a rural part of the Northeast. I am thinking about buying a house. However, I am also thinking about going on the job market, since my first book just came out and I would prefer to live in an urban area.

Should I go ahead and buy, or wait another year to see if I am still here? I should add that my present rent is very low ($500 a month, including heat), and I doubt that I could find a mortgage payment anywhere near that low.

Answer: Ultimately, where you live now doesn't sound like the ideal place you want to be. If it were me, I would wait another year. You need to realize, however, that the downside of waiting is potentially higher mortgage-interest rates and home prices, as well as no tax deduction. Trust your gut.

Question: I'm very glad to see a financial-advice column for people in the education industry, and I look forward to reading it regularly. In your first column, one of your responses seemed to suggest that a person's entire mortgage payment is tax deductible. However, from the financial counsel of friends, mortgage lenders, and others, I thought that only the property taxes and interest payments -- but not the mortgage payment itself -- are tax deductible. Perhaps you could clarify that issue.

Answer: Sorry if my wording was confusing. Yes, you and your friends are correct. You get a tax deduction on the mortgage interest you pay and generally on the state, local, real-property, and personal-property taxes you pay for your home. The mortgage payment itself -- meaning the principal -- is not deductible.

In my previous column, what I meant to suggest was that in the early years of a 30-year mortgage, you could be paying virtually all interest and taxes, and very little, if any, principal. Consequently, the tax deduction would be substantial for the first few years, generating tax savings and additional cash flow that you could then put toward your retirement investments.

Purchasing a home, for most of you, is the single largest investment you will ever make. My column, and others like it, can answer some general questions, but I strongly encourage readers to seek out specific advice from competent tax, legal, and financial professionals who can review all of the details of your situation.