Your 401(k) and the tax code

Question:

Is it OK to leave my money in my 401(k) until I'm 70? My wife and I retired from our work three years ago at age 57. We have employer retiree health insurance for both of us at a $100 per month. We own our home and have no debt. Between our two pensions and about $20,000 my wife makes working part-time, we have plenty of income to do and buy what ever we want. As we don't need the money from the 401(k) (and may never need it due to the addition of Social Security next year), I would like to pretend it doesn't exist and just leave it alone. Is there any big downside to doing this?

Answer:

Yes, but you have to start taking those distributions at 70. The IRS isn't going to let you continue to stash the money away after April 1 of the calendar year in which you turn 70 1/2. Under tax law, you have to take minimum distributions from your 401(k) that year. The IRS says these minimums are designed "to make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries." Read that to mean that the government doesn't want you to take the tax breaks you get on a retirement plan and just pass it on to your heirs.

So, how much do you have to take? There's a formula you use to divide the value of your 401(k) plan by a divisor based on your life expectancy. You can find the uniform life expectancy table at http://www.irs.gov/publications/p590/ar02.html#d0e12457.

See the IRS's Publication 575 at http://www.irs.gov/pub/irs-pdf/p575.pdf for more details.