This month’s column is written in response to a question posed by a reader of The Priest magazine who writes, “I turned age 70 in May of this year (2013) and am the pastor of my parish. The diocese offered a 403(b) retirement plan to which I have been contributing a portion of my salary for several years. I received a letter from the investment company that manages my fund telling me that I might need to withdraw some of my retirement savings because I am over 70½ years old. I called the diocesan office and they told me that I do not need to withdraw anything. Who is right?”
The answer to this priest’s question is that both answers are correct. The investment company said that he “might” need to withdraw a minimum amount from his 403(b) because he turned 70½ years old during the tax year. There is an exception, however, for those who continue to work beyond age 70½. As long as the pastor remains on salary he may defer his withdrawals until he retires. Therefore, the diocesan office is correct that he need not withdraw funds from his 403(b) retirement plan.
The concept in question is the “Required Minimum Distribution” rules applicable to retirement plans. The purpose of the tax incentives for retirement plans was to encourage taxpayers to provide a supplementary source of income to retirees, not to allow taxpayers to endlessly accumulate tax-deferred portfolios. Therefore, the government initiated the required minimum distribution rules for personal retirement accounts. The rules require that owners of personal retirement programs begin to withdraw funds from their IRA accounts by April 1 of the year following the year in which the taxpayer turns age 70½, but owners of 403(b) plans may defer withdrawals until retirement.
The distribution requirements increase in amount as the owner of the retirement account ages. In “normal” investment markets, the annual earnings for the retirement fund often exceed the minimum distributions so that a retiree’s retirement may increase from the balance at the beginning of the year despite a required withdrawal from the fund. For example, the minimum distribution for a priest age 75 is 4.367%. Most mutual funds yield more than 4.367% annually on average, so a priest withdrawing the minimum amount required would find his portfolio increasing at the end of the year since the portfolio earnings exceed the withdrawal.
The exemption from the required minimum distribution applies to 403(b) and 401(k) plans, but not Individual Retirement Accounts (IRAs). If a priest is age 70½ by December 31, he must withdraw at least 3.65% from his IRA account balance or face penalties for failure to withdraw the funds. He may defer the withdrawal until April 1 of the following year in which the required minimum distribution applies. Since the deferral applies to the first year only, if a priest opts for the deferral in the year he turns age 70½, in his 71st year he must make two withdrawals, one for the previous year and one for the current year.
There is one other option of which priests should be aware. For 2013, a priest who would rather donate part or all of his personal retirement fund, may transfer it tax free to a qualified charity. The maximum amount he may transfer in one year is $100,000. This provision expires at the end of 2013 unless extended by Congress. Any amount transferred from his personal retirement account to a qualified charity also applies to the required minimum distribution for that year.
MR. LENELL, C.P.A., Ph.D., is the director for financial and administrative services for the Diocese of Rockford, Ill. Dr. Lenell’s book Income Taxes for Priests Only is published by “Fathers Guide.” He lectures and conducts workshops and does consulting to several dioceses on priests’ taxes, compensation, and retirement planning. Write to Dr. Lenell, c/o The Priest magazine with questions, or e-mail him at WayneLenell@fathersguide.org