Get the Most From Your Pension Distributions

When you retire or when you reach the age of 70-1⁄2, whichever comes first, you must start taking a distribution that is called a "required minimum distribution" from your retirement plan, an amount based on the prior year's account balance divided by the number of years you have left to live according to the actuarial tables the IRS uses. The required minimum is re-calculated each year based on this formula.

Dolan Warning: If you fail to take the minimum in any given year, you'll be subject to a 50% tax penalty on the amount you were supposed to withdraw unless the value of your plan has declined so much that it's lower than the required distribution amount. (Small comfort!)

Here is a very important question that we get asked all the time: "How should I take my retirement benefit payment?"

Should you:

• take 100% of your benefit and have no payment go to your spouse/partner when you die?

Or...

• take a reduced benefit and have a payment continue to go to your spouse/partner if he or she outlives you?

Although we are simplifying this question—because specifics vary from plan to plan— we emphatically want to make a point to help you make the best decision for your circumstances. Let's look at the two options with more detailed examples...for illustrative purposes only:

Option #1: The employee (we'll use the husband) is about to retire. He'll receive the full monthly payout (say $1,000) for his lifetime but because he chose the 100%-of-benefit option, the pension check stops if he dies before his wife. The wife will receive no monthly benefit.

Option 2: The husband could opt to take 85% of the monthly benefit. He'll receive a check for $850 each month for his lifetime. However, should he die before his wife, she will continue to receive half of his benefit ($425) for the rest of her life.