Episode 66 – DCP withdrawals, rollovers, and RMDs
Episode transcript:
[music intro]
Jenny
Welcome back to Fund Your Future with DRS. Well, we’ve talked a lot about DCP and putting your money in and why you should put money in. But we really wanted to talk today about when the time comes that you’re ready to take the money out of DCP and how that whole process works, of rules that can be applied, but also options that you have for your DCP funds. So, we’ve invited Ginny to the podcast studio with us to talk a little bit more about DCP withdrawals. Welcome.
Ginny
Thank you for having me.
Seth
So, this question came from a listener, they asked like 12 questions about DCP, about getting your money out. And I think we have focused a lot of our conversations on putting money in, as Jenny was saying, because we’ve been focused, I think, on younger folks and getting started. And so, if you want to listen to episodes 11 or 21 or 24, we have lots of basics about DCP.
But Ginny, if you could just give us a brief reminder for our listeners who maybe haven’t listened to those episodes, what are some of the advantages of saving money in DCP while you’re working?
Ginny
Sure. So, these are tax advantaged accounts. So, the pretax deferrals lower your taxable earnings when you’re working. So that’s when your income is likely to be higher than when you’re in retirement. And then because those taxes aren’t withheld upfront your contributions can buy more shares when you’re still investing. And then if you contribute Roth funds those grow tax free.
So, you’re not going to pay taxes on the gains until you withdraw those funds, as long as you’re at least 59.5 and have held the funds in the account for at least five years. There’s no early withdrawal penalty, unlike some other retirement accounts, the administrative and recordkeeping fees are quite low, and then we have a wide range of investment options for people to choose from.
Seth
Yeah, I think that no early withdrawal penalty is one of the biggest advantages when people learn about that, especially if they’re thinking about retiring early and thinking like, oh, I can put that money in, I’m not gonna have to pay an additional tax penalty.
Jenny
Like you said, it’s great for people who are especially thinking about that early retirement. You can put more money in than you can with an IRA, and you can take the money out as soon as you’ve separated from public employment.
Seth
Yeah, it’s a lot of flexibility. I know we had Catherine on a recent episode where she was talking about one of the ways she thinks about it is it’s like a backup emergency fund as well. If you’re going through some sort of job transition or job loss, that you have that money available to you as well, though, the primary focus is to ideally save for retirement.
And so, we really wanted to focus this conversation on getting money out of the account, because I think one of the challenges for people is they’re really good savers sometimes aren’t really good spenders. And it can be hard, like you build up this habit of saving and saving and saving and then you don’t know how much you can spend.
So, could you just talk a little bit about the different ways a person can get the money out of the account?
Ginny
Sure. So, you can leave the funds in there. Just let them grow and take it out. You could set up monthly, quarterly, annual payments to yourself, or you could roll them into another retirement account if you have another eligible retirement account and it’s nothing that you have to decide right away, you can leave the funds in there and wait and decide later.
Seth
I think that’s a really common thing. People get confused when they leave a job. They think they have to take their retirement account with them. There’s some like myth that within 90 days you have to do something with your account. And oftentimes we hear from people when they leave, they’ve been participating in DCP and they leave. They actually wish they could put more money in, you know, they want to roll money into the account, which you can do even if you’re not working as long as the account is still open.
Ginny
Right. That’s correct. As long as you still have a balance in the account, you can roll funds in. I do want to say you can’t roll a Roth IRA in, but other eligible accounts you can roll in.
Jenny
Gotcha. Which is kind of nice because while you’re working, those DCP funds just have to come out of your paycheck. You can’t just say, oh, I have this $5,000 sitting in my bank. I want to put that towards DCP. It has to come out of your paycheck. But like what you’re saying, after you’re separated, you’ve still got this DCP account. Then it sounds like from what I’m hearing is if you do have this, say, $5,000, sitting in a…
Seth
It still has to be a retirement account. So, it’s still a rollover. And you can rollover while you’re working as well. I think one of the common things people do is they just want to consolidate. They’re just looking to… It’s easier to keep track of. If you had 5 or 6 jobs and you want to just keep track of where the money is.
But so, Ginny, as you were saying, you can roll the money out. You can keep it as long as you want until the IRS gets involved. Because if you haven’t paid taxes, the IRS wants some of their money.
Ginny
Right. The IRS does require they’re called required minimum distributions. And so, then you do have to take funds out at that point. If your balance is small, it might make more sense to withdraw the funds earlier. Just so you’re not stuck with some really small required minimum distributions or RMD payments.
Jenny
And let’s be clear the RMDs, or required minimum distributions don’t kick in until you’re 73 years old.
Ginny
Correct.
Seth
And at some point in the future it’s going to go up to 75. But currently for people, if you’re approaching that age and you have a DCP account at age 73, you’ll have to start taking these minimum distributions. And we’re going to do a separate episode about minimum distributions, because that’s a whole nother conversation.
Jenny
But really quick for our listeners just to maybe give a ballpark if they hadn’t looked into RMDs yet. Is it like 10% of the account?
Seth
I just looked this up because my parents are getting close to RMD age, and I was trying to like, warn them how much money they’re going to get. Your first RMD is like 3.5% of your account.
Jenny
So it is really small.
Seth
It is really small. But for people that have $1 million in an account or something like that and you’re not expecting it, you know, $30,000 of income in some ways it forces people to start spending that money. And so some people, that is their distribution strategy. Ginny mentioned people can take money out of their DCP on a regular basis or they can, you know, they can set it up to come out monthly or quarterly or annually, or they can just take it out whenever they need something.
Ginny
Yeah. Want to go on vacation or need to repair the roof or something like that. Yeah, you can take a one time lump sum payment.
Seth
Yeah. And so those minimum distributions are really you have to take out at least that amount.
Ginny
I do want to say for those, if you set up those regular monthly or quarterly payments, you can change or cancel those at any time. So, you’re not stuck with that once you put that in motion.
Seth
I was really thinking about that for the early retirement folks who people are thinking about, hey, I’m going to maybe quit work at 60, but I’m going to wait and collect my pension at 65, or I’m going to wait and collect my Social Security at 70. Maybe I set up monthly payments out of my DCP to get me to that next paycheck. So, it operates sort of like a paycheck, that you’re getting that money that, you know, you can spend.
Jenny
Yeah, I love that idea. We’ve talked about that before. It’s kind of this bridge, like you said, that people might use, between setting their DCP up as monthly payments until they turn 65, and then they’ll start collecting their pension.
Seth
I think one of the other questions our listener was specifically asking and I think one of the things that makes people nervous about DCP or really any retirement savings that’s not a pension or annuity, is that the money can run out. So are there things people should take into consideration, or what are ways that a person could manage that or think about?
Ginny
So, we do have a withdrawal calculator on the website and it works for either your DCP or your Plan 3 funds. Or if you had another account somewhere else. But you can plug in what you project your balance to be and put in some other information, and it will tell you how long those payments would last. If you took monthly payments of, say, $1,000 a month or whatever you selected.
So that can help you get an idea of maybe how much you should be saving as well, if you can see how quickly you’ll use it when it comes to withdrawing it. And then I’ve heard of other theories that people have about how much you should withdraw each year. And of course, everything is going to depend on your personal accounts, your personal finances. I’ve heard of a 4% rule, so there’s different ways to approach that.
Seth
Yeah. And that’s I think one of the things for people to keep in mind is that money is still invested, so it could still grow or shrink, depending on what investments you’ve chosen and how the market’s doing at that time period. So, I think a lot of times people get nervous about needing a certain dollar amount and they think, oh, I need $1,000 a month to be able to make sure I cover all my bills.
But there are options that people have with their DCP that they can turn it into a guaranteed income for the rest of their life. Do you want to talk a little about the annuity options?
Ginny
So, if you’re retiring, meaning starting your pension, you can purchase an annuity with pretax DCP funds. And what that does, is it gets added on to your pension payments. So, you’re sort of converting that account into lifetime monthly payments for yourself. And you can get an estimate. We’ve got estimates, a place to run estimates on your online account so you can get an idea of how much you could get for a certain dollar amount.
And it doesn’t have to be using all of your account for that. You could only use part of it. It is a one time option at retirement though.
Seth
Yeah, it’s a way to convert that lump sum into that guaranteed income. So, you’re giving up the flexibility of having that, you know, to go out and buy a house or a boat or pay off debt or whatever, but it guarantees that maybe you’re going to be able to make your insurance payments.
Ginny
And one nice thing with that is if you were to pass away before, say, you bought one for $100,000 and you passed away maybe a couple of years later, the balance that hadn’t been paid back out to you yet would go to your beneficiaries.
Seth
That’s a really good point, because oftentimes people see those investment accounts as inheritance. That’s maybe why they’ve saved the money, is that they want to pass it on to someone else.
Jenny
Yeah. So, we get a lot of questions about what happens to my DCP account if I pass? So really it’s those beneficiaries. So all the more reason to make sure you’re regularly going into your online account checking those beneficiaries that are listed. You know people have life changes marriages divorce kids, whatever it is to make sure that it’s your information’s updated and that money is going to be passed to the person you wish it to be passed to.
Ginny
Right. We do have people who call in and are surprised that it’s a former spouse still listed or, you know, former partner or somebody they didn’t realize was still on the account. That is a good idea to check that somewhat regularly.
Seth
Yeah. And that beneficiary, that’s for your annuity or just for your DCP. If you hadn’t bought an annuity, you still have that DCP account balance. If you pass away at 35 or 85, it’s going to go to who you have listed as beneficiaries. Could you talk a little bit about the different ways people can get money out? Maybe unexpectedly or while they’re still working? One of the reasons that stops people from saving is that they’re concerned about why [they] might need access to that money.
Ginny
Sure. So, if you are still working, there are some emergencies that you can withdraw the funds for. Those are defined by the IRS. So, you would work with our record keeper, Voya Financial, on that. There’s an additional some additional paperwork that you would need to complete for that.
Jenny
Do you want to give us an example of one of those IRS approved emergencies?
Ginny
So, a medical emergency would qualify, if you were going to be losing your housing, that’s another qualifier. I do want to point out, though, that credit card debt, things like paying tuition down payment on a house, those things do not count towards that.
And then if you’re over 59.5, you can withdraw those funds even if you’re still working. So that’s a nice option for people who are maybe getting closer to that age or older than that age, that it’s not a it’s not stuck in the account. If you want to pull it out later, you can do that.
Seth
I think we kind of buried the lead on something. So, let’s just say a normal circumstance person retires at 65. They’ve got their DCP account and they’re ready to take some money out. Whether they’re going to set that up to come out monthly or quarterly, or just take $5,000 to go buy a motorcycle. What is the process for somebody to initiate that first payment out of their DCP?
Ginny
So, we don’t take paper forms for that anymore. They would just work with our record keeper, Voya Financial. They can do that online or by phone. One important thing to note is if you don’t qualify for some of those other withdrawals, we do need to have your separation date from your employer, your separation notice, and you can’t withdraw the funds until we have that.
And that can sometimes take maybe a month after your final paycheck. So, it’s a good idea not to plan to need that money. Don’t plan to use it for a down payment on a house. But I’ve talked to people who were waiting for the money. It’s very stressful if they need it by a certain date.
Seth
Yeah, best to plan for a couple of months after you retire to be able to access that money. If you’re buying your Winnebago or whatever it is. Because you’re right. I think everybody who’s answered phone calls at DRS has had to help people realize that it’s going to take a little bit longer because we don’t know they’ve stopped working yet. And that’s the key, is we need to know that they’ve stopped working.
Ginny
And that’s good in general to note and maybe leave a couple months before making any major decisions, just to make sure. If you’re counting on proof of your pension amount, you need to wait until you’ve actually been paid. That kind of thing.
Seth
That does remind me about one other thing. We wanted to make sure we touched on for this episode was: your DCP funds can run out because you’ve spent them down. Your pension is guaranteed for your life.
Jenny
So that’s true. That’s a huge distinction.
Seth
Yeah. Huge distinction. I think sometimes people get confused, especially Plan 3 members who have an investment account and a pension, that they can see those two things going together. And so we’re really just talking about the investment accounts today and making sure you have a plan for how you’re going to spend those or what you’re going to use them for, or not use them for.
And then remembering that the IRS is going to want you to start taking some, out to, to pay for taxes. And we’ll talk about that in a future episode.
Jenny
And then I think one of the other questions that comes up sometimes is rolling funds out of your DCP. We talked a little bit about, you know, sometimes people want to consolidate their accounts, but are there other reasons why people may want to roll the funds out?
Seth
Yeah. And what would that process look like?
Ginny
Sure. It’s a type of a withdrawal. So, they would work with our record keeper again, Voya, online or by phone. But the important piece about that is you want to contact the other financial institution, whoever you’re rolling the money over, to, make sure they’ll accept the funds and then find out what the process is on their end. They may have paperwork that they need you to complete for them to be able to accept the funds.
Seth
Whether you’re rolling funds out or rolling funds in, you have to think about it is like a dance between two different organizations, and you have to figure out what the rules are. And the processes can be different between the organizations. And it usually involves somebody sending you a check and then you forwarding that check to the other institution so it can feel a little bit clumsy or complicated.
Seth
But there isn’t a direct deposit transfer situation like you do have between banks, because these financial institutions need to understand more information. They need to know if it’s Roth dollars or they need to know when you started the account.
Ginny
That’s a good point about the Roth piece of it. If you’re rolling Roth funds into our account, you are going to need to provide us with the date of your first Roth contribution and a breakdown of those contributions and earnings. And that’s in case you were going to withdraw the funds before age 59.5 or before they’ve been in the account for five years. And so, we need to know how much of that is taxable.
Seth
One of the things people think about with DCP, is that they might use it for specific things. They might spend that money to cover their mortgage payment or cover their insurance payment. And one of the biggest expenses for retirees is medical insurance. And so how would a person use their DCP to cover insurance, whether they’re starting to collect their pension or not, starting to collect their pension, but they want to start self-paying for their insurance and using their DCP dollars. How would they do that?
Ginny
So, you’re not able to set up just a direct deduction for that. But what you could do is you could set up a monthly payment that gets deposited into your checking account and then pay it out from there. And I would recommend that you talk to whoever you’re paying the funds to and find out the process from them, but that would be the best way to do it.
Seth
It’d be kind of like similarly, if I just wanted to pay my garbage bill out of my DCP. I would just have DCP put $50 into my bank account every month, and then I would pay my garbage bill directly out of my bank account. It’s sort of a two-step process, but you’re using your DCP funds to fill your bank account and then spend that money out of your bank account.
Ginny, is there anything else you want somebody who’s in DCP or thinking about being in DCP to make sure that they’re aware of?
Ginny
I’m sure we talked about the withdrawal calculator, but we’ve got a couple of other calculators on the website that can be really helpful. There’s a DCP Roth versus pretax if you’re trying to decide between the two. And just to be clear, you don’t have to do one or the other. You could do both. But that can give you an idea which might be better for your situation.
The other one is a DCP savings calculator. So, it gives you a way to see how much your account could grow over time. So maybe if you have a certain amount of that you’re saving for, or you could use that in conjunction with the withdrawal calculator. That can help you decide how much you want to put into the account.
Jenny
And we’ll put some links to those in the description of the podcast. Yeah. Well, thank you so much, Ginny.
Ginny
Thank you for having me. Yeah.
[music outro]
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