Example of partnership liquidating distribution
He has a 0,000 balance in his 401(k) plan at work, a 5,000 401(k) plan from his prior employer (still held in the old 401(k) plan), and ,000 in various contributory and rollover IRAs.Because he is still working, he will not need to take any RMDs from his 0,000 401(k) plan until he actually retires, with the first RMD due for the year he actually retires.To resolve this issue, in 2014 the Treasury issued proposed Regulations that would permit a limited portion of retirement accounts to be invested into a “Qualifying” Longevity Annuity Contract (QLAC), without violating the RMD rules.Specifically, the rules stipulated that a retiree can invest up to 25% of his/her retirement account balances (up to a maximum of 5,000) into a longevity annuity, and the fact that the longevity annuity payments begin as late as age 85 will not cause that portion of the account to fail to satisfy the RMD rules.In recent years, the academic research has increasingly focused on the potential role of longevity annuities as a retirement income strategy.The longevity annuity is akin to a traditional single premium immediate annuity, which converts a lump sum into an (illiquid) guaranteed stream of payments for life (or a period certain).With the expectation that once someone reaches retirement, they will begin to take distributions – and Uncle Sam will finally get his share of the tax-deferred account.To ensure this final outcome, the Internal Revenue Code that retirement account owners begin liquidating their accounts upon reaching age 70 ½.
Notably, this exception applies Dennis is turning 70 ½ in 2018, but is still working full time for his current employer.
The fact that longevity annuities provide very sizable payments in the later years is a combination of the simple time value of money (the dollars can grow for 20 years before they pay out), and the impact of mortality credits (payments are increased with the dollars of all those who don’t live the first 20 years until the payments begin).
Which ironically makes the longevity annuity especially effective as a hedge against outliving one’s retirement dollars – as if the retiree lives a long time, he/she receives a whopping 30% payout rate (albeit starting in 20 years), and if the retiree doesn’t live a long time…
Of course, for those who actually need to use their retirement account to fund their retirement lifestyle anyway, distributions will likely be occurring already.
However, for those who don’t the funds, the Required Minimum Distribution (RMD) obligation ensures that at least some money is distributed – and taxed – every year.
The good news of the still-working exception is that it avoids the requirement to begin taking mandatory RMD withdrawals from a current employer’s retirement plan.