Q.: I am 69 years old and do not plan to retire until I am in my late 70s. I have $250,000 in my New York City Employee IRA and $600,000 in my 457(b) account. As you know IRAs are subject to annual Required Minimum Distributions (RMDs) beginning at age 70.5, even for those of us that are still working. I do not need these mandatory withdrawals because I will have my paycheck. It is wrong to compel people like me into a higher tax bracket while still employed. Is there a way of postponing these mandatory withdrawals until such time as I stop working? P.J.
A.: I do agree, and you can postpone these RMDs. Using the direct rollover option, transfer, prior to attaining age 70.5, your NYCE IRA balance to a special 401(k) Rollover Account maintained by the Deferred Compensation 401(k) Plan of the City of New York. The 401(k) Plan allows people in your situation to defer the taking of RMDs until the year they retire. For you this will be in about 10 years. Do you have other IRAs? Now is an excellent time to transfer them to the special 401(k) rollover account.
The 60-Day IRA Rollover Rule: An IRA owner has the unbridled right to withdraw money from an IRA and use it for any legitimate purpose so long as the withdrawal is returned to the IRA within 60 days.
Jimmy has a $100,000 balance in his NYCE IRA. He wants to withdraw half and invest the $50,000 in a stock that his father-in-law has invested in. He hopes to make a short-term killing on this outside investment and before the 60-day window closes, redeposit the $50,000 in his IRA with no questions asked.
Good or bad? If this speculation works out it will be a good deal but what if the stock stumbles and is worth just $40,000 with the 60-day window closing fast? Jimmy wants to wait it out because his father-in-law is a great believer in this company. Jimmy does not have another $50,000 that he can deposit in the IRA, so he does nothing and must pay income tax on the $50,000 withdrawal plus a 10-percent Federal excise tax because he is younger than 59.5.
Let’s assume the income tax due is $10,000 and the Federal excise tax due is $5,000. Does Jimmy have the $15,000? Maybe Jimmy can borrow the $15,000 from his investment adviser, his father-in-law. Get the picture?
Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by phone at (732) 536-9472, or via email at firstname.lastname@example.org.
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