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Investment Earnings Of RMDs Subject to Tax

By JOEL FRANK
Posted 8/13/17

“Deferred Comp,” as it’s affectionately known, offers city workers an opportunity for pre-tax and after-tax investing for retirement. I recently reported that a 2015 Harvard University study concluded that in all situations it’s better to save on an after-tax or Roth basis. Long before the publication of the Harvard study, the city adopted after-tax or Roth features to its 457(b) and 401(k) Plans, as well as to its NYCE IRA Program. Deferred Comp is the nation’s finest investment plan. Make sure you take full advantage of it.

With that said, I am recommending that city employees invest only on an after-tax Roth basis to both plans. Starting at age 70½, Roth 457(b) and Roth 401(k) balances are subject to Required Minimum Distributions (RMDs). While such RMDs are tax-free, the future earnings generated by the reinvestment of the annual RMDs are subject to tax. Example: Assume a year-one tax-free RMD of $50,000. The $50,000 is reinvested and earns 6 percent, or $3,000. The $3,000 is subject to tax.

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