How Are My Minimum Distribution Option Payments Taxed?

Payments received from TIAA-CREF's Minimum Distribution Option will be reported to the Internal Revenue Service as income. Because most TIAA-CREF contributions are made on a tax-deferred basis, withdrawals are usually fully taxable as ordinary income. Howver, if you made any of your contributions with after-tax dollars, a portion of each annual payment will not be taxable. At the end of each year we'll send you a 1099 tax report showing how much income you received along with how much of your income was taxable and nontaxable (if any).

You can choose whether or not to have federal income tax withheld from your payments. State withholding may apply as well and requirements vary from state to state. You should consult your tax advisor to see what is required in your state.

The value of retirement benefits that pass on to your heirs is generally part of your estate for federal tax purposes. If your gross estate is $625,000 or less (for the 1998 tax year, and gradually increasing to $1 million by the year 2006), your benificiaries won't be subject to federal estate taxes. Also, benefits passing to your spouse * qualify for the unlimited marital deduction and are not subject to estate taxes.

* Your spouse must be a U.S. citizen to qualify for the unlimited marital deduction.

Retirement assets are expensive to leave to your heirs because they are potentially subject to both estate and income tax. If you look at the net amount a nonspouse beneficiary would potentially receive after income and estate taxes, as much as 80% to 90% of the accumulation in a large estate could be lost to taxes. A retirement fund is an appropriate vehicle for accumulating retirement income. However, it may not be appropriate for preserving an estate. For these reasons, if you have a substantial accumulation, think about estate tax issues and consult a tax advisor or estate planning attorney.

Tax Update: The Taxpayer Relief Act, passed in August 1997, made extensive changes to the rules governing pensions, 403(b) annunities, and IRAs. A provision of this new law permanently eliminates the 15% excise tax on excess distributions taken after january 1, 1997, and excess accumulations on estates of those who died after December 31, 1996. You should take this into consideration and perhaps reevaluate your income and estate tax planning strategy.

Next: How Can I Reinvest My Minimum Distribution Option Payments With TIAA-CREF?
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