Understanding Pension and IRAs for Retirees

If you’ve worked for any length of time, you may have some type of pension or retirement money owed to you from your former company. In addition, you may also have saved on your own by contributing to an IRA. Now is the time you can tap into your retirement accounts to produce retirement income.  
  
You’re not required to begin taking money out of your retirement funds before age 70½, even if you’re retired. (You don’t have to take withdrawals from a Roth IRA at any time during your lifetime; unless you own more than 5% of the company, you don’t have to take withdrawals from company retirement plans at any particular age if you’re still working.) Money left in a retirement plan continues to earn money on a tax-deferred basis. You don’t pay any tax on the earnings until you begin to take distributions. If you don’t have an immediate need for money from your pension or IRA, leave it alone and let it continue to grow.   
If you continue to work past retirement age, you can continue deferral of your pension. Your employer doesn’t have to pay out your retirement plan account when you turn age 70½ (assuming you don’t own more than 5% of the company). But this option for continued deferral applies only to retirement plans with your current employer. So, for example, if you used to work for Company X and earned a pension there, it will begin to be paid out when you reach 70½ even though you’re still working for Company Y. Starting in 1998, there’s a new type of retirement savings plan, called a Roth IRA. While contributions aren’t deductible, Roth IRAs offer the opportunity to earn tax-free income. You’re not taxed on earnings if funds stay in the account at least 5 years after the contributions are made. If you make contributions to a Roth IRA, you don’t have to take funds out at any particular time, regardless of your age or whether or not you’ve retired. So, for example, if you contribute to a Roth IRA in 1998, 1999, and 2000 when you’re working, you don’t have to take distributions even though you retire in 2001.  
  
While 70½ generally means the end of tax deferral and the time when retirement plan distributions must begin, you can certainly take money out earlier. The only drawback is a 10% penalty if you begin withdrawals before age 59½ and you’re not eligible for an exception to the penalty. You can tap your IRA penalty-free for the following reasons:  

•  You’re disabled.  
•  You take the money out in a series of payments that are figured under one of several annuity-like methods.  
•  You use the funds to pay medical expenses exceeding 7.5% of your adjusted gross income (even if you don’t itemize your deductions).  
•  You use the funds to pay health insurance, and you’re unemployed for at least 12 consecutive weeks.  
•  You use the funds for first-time home buying expenses for yourself, your spouse, your child, your grandchild, or even your parent. There’s a $10,000 lifetime cap for this exception.  
•  You use the funds to pay for higher education costs for yourself, your spouse, your child, or your grandchild.  

  
If you’re owed a company pension, it may automatically be paid to you in the form of a monthly check. Alternatively, you may be given the right to take your pension in a lump sum. You can then roll it over to an IRA or have it transferred directly to an IRA, and begin to take benefits in amounts and on dates most convenient to you. If you have a regular IRA (and/or rolled over company pension benefits to an IRA), you can set up any withdrawal schedule you wish. You have full flexibility here. Take benefits out weekly, monthly, quarterly, or annually as you desire. The only restriction is the type of investment vehicle you’ve chosen. For example, funds in a one-year CD can’t be withdrawn until the end of the CD’s year term (some banks are willing to break CDs before maturity without penalty for IRAs, but they won’t do it routinely). Mutual funds may also have restrictions on when they will pay out amounts. Generally, you can arrange for monthly checks from mutual funds holding retirement money.  
  
The point to note about company pensions is the fact that they’re generally not adjusted for inflation. They’re fixed according to your salary or some other measure. Once the pension becomes fixed, it remains at the same level throughout your retirement. If you are a volunteer firefighter, you’ll be entitled to $20 per month for each month of service, with benefits payable beginning at age 65. After seven years in the plan, you’re now entitled to a pension of $140 per month. Of course, you won’t get that benefit for another 17 years. You could wonder however what $140 a month will be worth at that time?