We all know what "sticker shock" is when it comes to buying a new car.

Required Minimum Distributions from pre-tax retirement accounts begin at age 72. A client of mine just informed me that his first RMD from his IRA will be $68,588. He is experiencing RMD shock because RMDs are taxable.

He wanted to know why it's so much. I told him it's the result of being a wise investor, along with life-expectancy tables. I also told him he's going to continue to be hammered by taxes for the rest of his life if he doesn't make a serious effort to convert his IRA balance of $1,509,000 to a Roth IRA.

Are you planning to receive a pension based on a career of civil service? Are you planning to receive Social Security based on a career of civil service? Are you planning to supplement these two guaranteed income streams by taking full advantage of your employer's savings/investment plan? Do you expect to receive interest/dividend/rental income?

If you answered yes to these questions, you should be directing your supplemental contributions/investments to the Roth feature of your employer's savings/investment plan because you will have more taxable income during retirement than while you are working.

Note 1. With Roth investing, taxes on the investment/contribution are due at the time you make the investment/contribution. Accumulated profits generated by the investments/contributions are received tax-free during retirement. RMDs do not apply.

Note 2. With pre-tax investing you pay no tax when you make the investment/contribution. Profits generated by the investments/contributions accumulate tax-deferred. At age 72 the entire account is subject to taxable Required Minimum Distributions. These taxable withdrawals will be taxed at rates that are currently unknowable.

The TDA plan of the Teachers' Retirement System does not offer participants a Roth feature. What should they do? They should direct their supplemental investments/contributions to the Roth feature of the Deferred Compensation 457(b)/401(k) Plan of the City of New York.

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 rollover@optonline.net.

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