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Working Longer Doesn't Always Mean Saving Longer


Planning to work into your 70s? You need to know about Required Minimum Distributions.

As people live longer and healthier lives, many also choose to work longer. This can be especially true for dentists, who tend to score highly on surveys measuring overall career satisfaction. If you do plan to work past the typical retirement age of 70, you will benefit both from the extra income you’ll earn from working longer and the extra retirement investments you’ll make over that time.

But there is also an age at which you must start taking required minimum distributions (RMDs) from tax-deferred retirement vehicles such as 403(b), 401(k) or individual retirement accounts (IRAs). Why? Well, it’s mostly because Uncle Sam can only wait so long to get his designated portion of those funds.

Once you reach age 70½, the IRS requires you to start taking annual distributions of at least a minimum amount from each tax-deferred retirement account you own. (One of the key advantages to Roth IRAs, which are not tax-deferred, is that they are not subject to RMDs.)

The minimum amount you must withdraw is subject to change each year, but you can find the amount you’ll have to withdraw from this page on the Internal Revenue Service website. The IRS page also has detailed information on exactly when you need to start taking RMDs. Many financial services companies and retirement providers also offer RMD calculators, and most offer guidance on what you’ll need to withdraw and when.

But it’s very important that you know what, and when, you have to begin taking distributions. Failure to comply with these regulations can result in hefty excise taxes of up to 50% of the full amount that was required to be distributed. That can very quickly add up to a significant hit to your nest egg.

Still working? It may not matter.

Let’s say you’re a dentist in a group practice setting or at an academic health center. That plan may, under certain circumstances, allow you to wait until after you’re retired to take your first RMD from that plan, even if you’re over age 70½. Ask your plan administrator or read the plan documents to see if this is the case. In the meantime, you may be able to consolidate tax-deferred money from other retirement accounts into your current employer’s retirement plan, which would allow you to put off taking RMDs on the transferred money until retirement. Not all plans allow for such rollovers, and they can become a bit complicated, so check with your plan administrator or your financial advisor.

For many dentists not covered by an employer-sponsored plan, generally your RMDs for whatever tax-deferred retirement plan you have must start by April 1 following the year you turn 70½, even if you’re still working.

Some other things worth noting:

• After taking a first RMD from a particular account, you must take an additional RMD from that account for each subsequent year by December 31 of the year.

• You—not your retirement provider, tax professional, or financial advisor—are ultimately responsible for calculating your own RMDs.

• You can, of course, withdraw more than the required minimum.

• You can not take money from an RMD and roll it over to another retirement account. Remember, the purpose of the RMD rule is to make what was previously protected from taxes taxable.

RMDs can be a little complicated, so if you’re nearing your retirement date and aren’t sure when to start taking distributions or how much to take, talk to a trusted financial professional. Just don’t be caught off guard if your savings plan involved keeping your investments locked in past the age at which you’ll need to start taking distributions.

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